Reader's lives: Can nurses retire in comfort?

Health service pensions ... National Savings ... building society interest. Your queries answered
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Your recent advice on pensions has led me to wonder about my own position. I am a 48-year-old registered nurse. Am I allowed to retire at 50 with a pension?

LH, Oxfordshire

Assuming you belong to the NHS pension scheme, you have an absolute right to retire with an NHS pension at any age from 50 onwards. This is regardless of how long you have belonged to the scheme. The right to take early retirement, introduced in March 1995, is quite separate from any provision that allows early retirement on the grounds of ill-health.

But if you do decide to retire before your normal retirement age, you will find that your pension is reduced. Normally your pension is calculated according to a formula based on 1/80 of the best year of your last three years' pay before retirement. For each year in the scheme you are entitled to 1/80, so after 20 years you get 20/80, or 1/4, of this "final salary" figure, up to a maximum of 40/80 (a half). But this figure is reduced if you retire before the normal retirement age. Likewise, the tax-free lump sum (three times the annual pension) will be reduced.

You can retire before your normal retirement age and then resume working for the NHS. If you go back to work you will not be able to rejoin the NHS pension scheme. But you could make payments to a personal pension instead. Any NHS pension you receive before your normal retirement age could also be further reduced if the pension plus your NHS earnings exceed the amount you earned before retiring. But this may not be a problem if you take early retirement and then go back part-time, or if you work outside the NHS.

This is a broad summary of nurses' NHS pension rights. Full details should be available from your local salaries department. Alternatively, contact the NHS Pension Agency, Hesketh House, 200-220 Broadway, Fleetwood, FY7 8LG.

I am about to cash in pounds 5,000 of National Savings Income Bonds because I get irritated at having to pay the tax on the interest at a later date (the bonds pay interest gross but taxpayers are then required to declare the tax in their annual tax return). Where else can I get good interest, paid monthly, but with the tax deducted already?

JS, South Yorkshire

National Savings Income Bonds are paying 6 per cent on balances of up to pounds 25,000 and 6.25 per cent on balances over that amount. With interest rates on an upward trend, there is every chance that National Savings rates could go up in the near future.

As our table of "Best savings rates" on page 15 suggests, the current rates are not quite the best available. But most of the other deals highlighted are for interest paid annually, rather than monthly, even if that interest is paid net of basic rate tax. Where there is a monthly income option (such as at Sainsbury) the annualised rate is lower than the rate where interest is paid yearly (in Sainsbury's case, 5.98 per cent compared with 6.15 per cent). For a fuller range of monthly-income options, you can get a complimentary copy of the MoneyFacts monthly bulletin by phoning 01692 500677. Among the best rates listed in the July edition is 6.3 per cent from Coventry building society's "Postal 50" account. But, as the name suggests, this account carries 50 days' notice and is operated by post. If you do not have a Tessa it may also be worth considering one of these (any income is altogether free of tax), although only a handful offer a monthly income option.

Having tax deducted at source is convenient for basic-rate taxpayers, because these people will owe nothing more. But financial common sense suggests you should never pay tax before you have to pay it. If you did decide to stick with National Savings Income Bonds, you could consider putting 20 per cent of your monthly interest (40 per cent if you are a higher rate taxpayer) into a separate account. You could set up a standing order to do this. Use this account to settle your tax bill when it becomes due. In the meantime, you will earn further interest on your delayed tax payment.

I have a joint building society account with my wife and put details of all the interest on my own tax return. Should I in fact declare only half the interest since my wife is a non-taxpayer?

TL, Cornwall

If you own half the capital each, each of you should pay tax on only half the interest and declare only half the interest on your separate tax returns. Since your wife is a non-taxpayer, she will have no tax to pay on her share off the interest. She is probably not asked to fill in a tax return, but should contact her tax office to reclaim the tax on half the interest.

Consider putting half the money into a separate account in your wife's name. She could then register as a non-taxpayer by filling out form IR85 (available from most banks and building societies). This would enable her to receive interest without having any tax deducted and means she would not have to go to the bother of reclaiming.

There is a further possible advantage in having two separate accounts. If your building society decides to become a bank you will each be entitled to receive free shares, assuming that your accounts meet all the qualifying criteria, rather than just one set.

Alternatively, you may like to think about making an outright, no-strings gift to your wife of all the money in the account. In this case, your wife could get all the interest without tax deducted.

q Write to Steve Lodge, Personal Finance Editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number. Alternatively, fax 0171-293 2096/2098 or e-mail: indybusiness@independent. co.UK. Do not enclose SAEs or any documents that you wish to be returned. We cannot give personal replies or guarantee to answer every letter. We accept no legal responsibility for any advice given.

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