UK Financial Services, regulations and ethics

Different rules apply depending on whether someone reaches State pension age (SPA) before or after 6 April 2016.

The State pension is received by anyone reaching SPA age on or after 6 April 2016, and the full amount is £203.85 per week in 2023/24.

Individuals who had already reached SPA before 6 April 2016 are unaffected by the introduction of the new State pension.

For those reaching SPA after the new State pension was implemented, it completely replaces the previous system of State pensions including the basic State pension, State second pension (S2P) and the savings credit element of the State Pension Credit, as well as being set above the level of the guarantee credit.

The Starting (or foundation amount)

Individuals who had not reached their SPA on 6 April 2016 had a starting amount calculated, also known as the ‘foundation amount’. This was calculated as at 5 April 2016 and is the higher of either:

The amount they would get under the pre-6 April 2016 State pension rules (which includes basic State pension and additional State pension); or

The amount they would get if the new State pension had been in plac...

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...ear the individual can take a taxable lump sum in lieu of increased BSP payments. The lump sum will be taxed at their marginal income tax rate before taking into account this lump sum, and interest is accumulated on payments forgone at 2% over the Bank of England base rate.

For those who reach their SPA on or after 6 April 2016, it is still possible to defer taking the State pension. The increase rate has fallen to 5.8% for each full year (1% for each nine week period), though it will no longer be possible to take the deferred amount as a lump-sum payment. The minimum qualifying deferred period has also increased from five weeks to nine weeks, and it is no longer possible for a spouse or civil partner to inherit a deferred new State pension.

State Pension benefit statements

State Pension benefit statements are now being issued by the Government. These are useful to understand whether paying Class 3 NICs would be beneficial and useful for those who have been contracted out in the past to understand the adjustment that’s been made for this.

State how the new State pension increases in payment.

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In November 2018 the SPA for women was equalised with men at age 65. Since December 2018 SPA for both men and women started to increase to 66 and this completed in October 2020. SPA will ...

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...ld be brought forward to between 2037 and 2039 (7 years earlier than previously legislated for).

When will the State pension age increase to 67?

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Class 1 NICs

Individuals become entitled to State pension through accumulation of qualifying years of NICs; Class 1 contributions are paid by employees and class 2 are paid by the self-employed (class 4 are also paid by the self-employed but these do not contribute towards the new State pension). A 'qualifying year' for State pension purposes is 52 weeks of Class 1 and/or Class 2 NICs paid in a tax year. Voluntary class 3 NICs can also be paid to cover any gaps.

Employees pay Class 1 NICs on earnings above £242 per week in 2023/24 – the primary threshold. They pay their contributions at 12% on earnings between £242 and £967 per week – the upper earnings limit - and then 32%...

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... 2023.

Class 3A contributions

Class 3A NICs were only available between 12 October 2015 and 5 April 2017, and only to pensioners who reached State pension age before the introduction of the new State pension on 6 April 2016. Class 3A NICs allowed someone to buy a higher level of Additional State Pension.

Class 4 contributions

Class 4 NICs are also paid by the self-employed who have profits in excess of an annual lower limit, which in 2023/24 is £12,570. Profits between £12,570 and £50,270 are charged at 9% and profits in excess of £50,270 are charged at 2%.

Which class of NICs are paid by the self-employed to entitle them to State pension?

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The State provides various death benefits to surviving widows, widowers and civil partners, depending on the circumstances. The benefit(s) provided depends in the first instance whether the spouse or civil partner died before 6 April 2017 or after 5 April 2017. We will only cover those benefits paid if a spouse/civil partner dies on or after 6 April 2017.

Where a spouse or civil partner dies after 6 ...

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...P pension.

Originally the survivor inherited 100% of their deceased partner’s SERPS entitlement

The inherited SERPS percentage steps down by 10% per year from 100% depending on the date of birth of the deceased

Only 50% of the deceased partner’s S2P entitlement is ever inherited

How much S2P can be inherited by a surviving spouse/civil partner?

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For those that reached SPA before 6 April 2016 they may be entitled to receive Additional State Pension such as:

State Graduated Pension Scheme

The State Graduated Pension Scheme (SGPS) was the first State scheme designed to provide an additional earnings-related state pension to supplement th...

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...econd Pension (S2P) replaced SERPS from 6 April 2002 until 5 April 2016. S2P was designed to provide benefits at least equal to those provided by SERPS, with low earners receiving higher benefits than they would have under SERPS.

When did accrual of S2P end?

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This is a means-tested benefit to give individuals and couples a minimum level of income in their retirement. There are two parts: the Guarantee Credit and the Savings Credit.

The savings credit was withdrawn with the introduction of the new State pension, though it remains available under transitional rules for those who m...

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...are deemed to generate an income of £1 a week for each £500 of savings (rounded up to the nearest £500).

Ben has savings of £16,000 held in a deposit account. How much income will these savings be deemed to provide for Ben to calculate Pension Credit entitlement?

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In the previous sections, we examined the products available to meet the range of financial needs that an individual may have. In some instances, we highlighted how the sums assured or the benefits payable would take into account any State benefits that the individual may also be entitled to. In this section, we will examine the main State benefits available, including how they are funded, who they are available to and how the amounts available to different individuals are calculated.

State benefits are funded through the National Insurance Contributions (NICs) paid by the employed, self-employed and employers; they are effectively a further tax. They are not paid by individuals under the age of 16, even though they may be working and have earnings, nor are they paid by those over State pension age. However, if an individual over State retirement age is still working, their employer will have to continue making contributions.

NICs are paid to Her Majesty’s Revenue and Customs (HMRC) and these are then passed on to the Department of Work and Pensions (DWP), who administer all State benefits.

The system of social security benefits provides financial support for people who are:

Unemployed and looking for work

On a low income

Bringing up children

Retired

Caring for someone

Unable to work due to sickness

Disabled

The range of State benefits available is extensive and in this section we will examine only the most commonly claimed benefits. Full details of all benefits is available directly from the DWP or from Post Offices.

Some State benefits are only paid to claimants who have paid sufficient National Insurance Contributions (NIC) to qualify (contributory), while others are paid regardless of the individual’s NIC contribution record (non-contributory). Some benefits are means-tested on income and others means-tested on the amount of savings or capital an individual may have. Some benefits are taxed while other benefits are not.

These factors can have a significant influence on the level of private provisions needed when undertaking any financial planning advice, so we will also highlight the factors that need to be considered.

You can see the current rates for these benefits on the DWP website www.gov.uk.

The Benefit Cap

The Benefit Cap was introduced as part of the Welfare Reform Bill, which received royal assent on 8 March 2012. From April 2013, a ‘cap’ has been placed on the total amount of benefit that working-age people can receive. This cap aims to ensure that households where no one is in employment do not receive more in benefits than the average earnings of working households.

The cap applies to the total amount of benefits a household can receive from:

Bereavement Allowance (if received before 6 April 2017)

Child Benefit

Child Tax Credit

Employment and Support Allowance (unless you receive the support component)

Housing Benefit

Incapacity Benefit

Income Support

Jobseeker’s Allowance

Maternity Allowance

Severe Disablement Allowance

Universal Credit (unless deemed unfit for work following a capability assessment)

Widowed Parent’s Allowance or Pension

The level of the cap is:

£423.46 per week for single parents whose children live with them (£486.98 in London)

£288.71 per week for single adults with no children or whose children do not live with them (£326.26 in L...

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... mobility component is payable at one of two rates – higher or lower - for people who have severe difficulty walking or who need help getting around out of doors.

Personal Independence Payment (PIP)

From 8 April 2013, Disability Living Allowance (DLA) ended for everyone of working age (16 to 64) and was replaced by this new benefit. It is based on assessment of individual needs and focuses on an individual’s ability to carry out a range of key activities necessary to everyday life, with information being gathered from the individual and healthcare professionals at a face-to-face assessment with a trained independent assessor. There is no automatic transfer from DLA to PIP.

Attendance Allowance

Attendance Allowance is a weekly cash benefit for those whose disability or assistance requirements started after they had reached age 65. It is paid at a higher or lower rate, is not means-tested and it is tax-free. It will not be paid to anyone in an NHS hospital or State-financed care home.

Carer’s Allowance

Carer’s Allowance is paid as a taxable weekly benefit to those of working age who spend significant amounts of their time looking after a severely disabled individual who is receiving DLA or Attendance Allowance. The claimant must not have weekly earnings above a stated level or be in full-time education.

Other benefits

Bereavement support payment

A spouse or civil partner will receive a tax-free lump sum of £3,500 (£2,500 if no children under 20 in full time education) on the death of their spouse if the deceased had made sufficient NICs, or their death was caused by their employment. This is followed by 18 monthly payments of £350 (£100 if no children). The recipient of the payment must be under State pension age or not entitled to a State pension at the date of death, and the claim must be made within three months of the death of the husband, wife or civil partner.

Cold Weather Payment

This is paid to people who are in receipt of other benefits and who need help with heating expenses during Winter months. £25 is paid for each seven-day period of very cold weather between 1 November and 31 March and if the average temperature is recorded or forecast to be below freezing for the seven consecutive days.

Funeral payments

Payments can be received by those on low incomes to assist with the costs of family funerals, but have to be repaid from the deceased’s estate.

Winter fuel payment

This annual payment is made to those born on or before  26 September 1955 with amounts varying depending on the individual circumstances.

Other benefits include: Council tax reduction, healthcare travel costs scheme, health costs, housing benefit, local housing allowance.

Points to consider for financial planning

When considering a client’s financial requirements and the type of products that match the client’s needs, it is vital that the adviser takes into account which State benefits they are entitled to (if any).

It may be that some clients will believe that the State will fully provide for them and their family should they be unable to work, retire or ultimately die. An important part of the advice process is to highlight the actual level of State benefit entitlement.

List the State benefits available to those unable to work through illness or disability.

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