Your money questions answered about pensions and NI contributions, tax on investment bonds, and equity release
Award-winning finance journalist, broadcaster and consumer rights expert Simon Read is on hand to help with your financial queries.
How much NI is needed for a state pension?
“To get a full state pension, do I need to carry on paying National Insurance after retirement? If so, how?”
If you haven’t paid full National Insurance contributions (or credits) throughout your working life then you may not qualify for the full state pension. To get the full new state pension you need 35 ‘qualifying years’ of paying National Insurance. Your National Insurance record before 6 April 2016 is used to calculate your ‘starting amount’.
If you were contracted out of the Additional State Pension, however – for example, through a workplace pension – a deduction is then applied.
If you’re no longer working but still under state pension age you can request a State Pension Statement.
If you think you’re likely to fall short of the full pension because there are gaps in your record from when you were unemployed or lived abroad, for example, then you may be able to pay voluntary National Insurance contributions to make it up. These can be made until you achieve a full new state pension or you reach state pension age, whichever comes first.
The government has some helpful information on state pension eligibility and how to pay.
Stay ahead with some more financial know-how:
When do I pay tax on investments?
“I have recently drawn 5% from bonds that I hold with LV= and understand I don’t have to pay tax on it now as the tax is deferred until the total is drawn. Do I have to inform HM Revenue & Customs that I’ve drawn the 5%?”
The simple answer is no. Investors can withdraw up to 5% each year of the amount put in to an investment bond without having to alert the tax authorities at the time of the withdrawal.
You’re right that, when the bond is cashed in, withdrawals will have to be added to your profit, if any, and taxed as income in that tax year. And you would have to inform the Revenue if your withdrawal triggered what is known as a ‘chargeable event’, but that should only happen if you draw more than 5%.
As long as you’re careful to avoid making two withdrawals in one tax year, the tax deferred allowance is allowed to continue until you’ve reached an amount that is equal to the total you invested. That means, effectively, that you can take payments of up to 5% of the value of the original investment each year for 20 years until you have withdrawn the lot.
You’ll still have to pay tax any profits you’ve made over that two decades, however.
How do we best free up some money from our home?
“We have a significant amount of value in our home and would like to use some of that to enjoy our retirement and to help our children get on the property ladder. What’s the best option: equity release, selling our home and downsizing, or something else? We considered renting out a room to raise cash but decide that we’re not keen on sharing our home.”
Your decision will have to be a personal one and should be made in consultation with your children. As a first step, ask yourself what’s your main motivation: is it to help your children, or is it to give yourself a better retirement?
Downsizing is an excellent option if, for instance, you want a smaller home or to move to a different area where property may be cheaper. It would give you the benefit of potentially having a more suitable home and freeing up cash to help your kids, although you should also consider the downsides of moving away from your existing support network of friends and family.
If you want to stay in the family home then you can raise some money against it through a lifetime mortgage, also known as equity release. I prefer the former title as it makes it easier to understand that you’ve taken a loan against your home that has to be repaid, normally when you die or need to go into long-term care.
The downside is that there’s interest on the loan that also has to be paid, and it leaves almost no chance of the family home being passed on – it will have to be sold to repay the debt. That’s why it’s important to talk it over with your children. It’s also crucial to get professional advice about the options as they apply to your individual situation – be sure to ask questions about fees and tax implications.