Learning Material Sample

Retirement planning Demo

5. State Pension Benefits

In this chapter we describe in detail the different aspects of the Basic State Pension and additional State Pension accounting for future changes that are targeted to take place.

The Basic State Pension (BSP) is a flat rate pension paid to everyone with an adequate national insurance contribution (NIC) record.

Entitlement is based on an individual’s NIC record. Those earning less than the NIC lower earnings limit pay no NICs and receive no pension, although a system of credits will ensure a benefit entitlement in some cases.

NIC credits are given on a weekly basis where:

Unemployment, sickness, or maternity benefits are being claimed;

An individual takes time off work to raise children up to age 12;

he individual is an approved foster carer or someone who spends at least 20 hours a week looking after a disabled person (although no credits were given under the pre-April 2010 rules for periods before April 1978);

Up until 5 April 2010, the individual was an unemployed man, under age 65, who has at least reached the State Pension Age of a woman with the same date of birth. Men born on or after 6 October 1954 will not receive credit. Men born on or after 6 April 1945 and before 6 October 1954 will get between 1 and 5 years of credits, depending on their date of birth;

The individual is over 18 and on a full ti...

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...reduced pension payments. The pension amounts will depend on the contributions paid or credits recorded for them.

Individuals are able to confirm the expected amount of Basic State Pension to which they are entitled, together with any State Second Pension, State Earnings Related Pension and any Graduated Pension, by completing form BR19 (which could be obtained from the DWP, any Pension Service office or downloaded from the internet) and returning it to the address shown on the form. The form can also be completed online and there is a full online forecast service for those registered with the Government gateway;

The forecast is normally sent to the individual but with permission it can be sent to a third party, such as an adviser, whose help may be needed to explain it;

Where appropriate, the forecast provides advice on how to pay voluntary contributions to improve the individual’s contribution record. This is particularly helpful to widows or married women who are paying reduced rate NICs and who might gain from paying the full rate.

State how the Basic State Pension increases in payment.

 

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The State Pension Age (SPA) is currently 65 for men and until 5 April 2010 it was 60 for women. Since April 2010, the SPA for women started gradually being increased from 60 to 65 for those retiring between April 2010 and 2020.

The Pensions Act 2007 also contained legislation to increase the SPA to 66 in the 2 years from April 2024, 67 in the 2 years from April 2034 and 68 in the 2 years from April 2044. The increases were to oper...

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...ore quickly to 65 between April 2016 and November 2018. From December 2018 the State Pension age for both men and women will start to increase to reach 66 in October 2020. 

The change in SPA will also result in changes to the timing of entitlement to other State benefits such as Pension Credit.

Explain the plans to speed up the rate at which State Pension Age will increase.

 

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There are 4 types of NI contribution:

Class 1 contributions

These are paid by employees on earnings above the primary earnings threshold (£149 per week for 2013/14) and by employers above the secondary threshold (£148 per week for 2013/14). The employer’s main NI rate is 13.8% for 2013/14. Employees pay a main rate of 12% on earnings up to the Upper Earnings ...

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...a rate of 9% in 2013/14. A further 2% is payable on profits above £41,450 in 2013/14.

Further details of national insurance rates and allowances can be viewed at the HMRC website at http://www.hmrc.gov.uk/rates/nic.htm .

What classes of contribution could potentially be paid by a self-employed individual on their profits?

 

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The State provides various different death benefits to surviving widows, widowers and civil partners depending on circumstances.

Bereavement Payment

A tax-free bereavement payment of £2,000 is paid subject to all of the following:

The deceased partner having a satisfactory NI contribution record (or their death has been caused by their occupation)

The survivor not having been living with someone else or connected with any unlawful killing of the late spouse/civil partner

The survivor being under State Pension Age and the deceased partner not having been entitled to the Basic State Pension.

Widowed Parent’s Allowance

A taxable weekly widowed parent’s allowance subject to all of the following:

The deceased partner having a satisfactory NI contribution record (or their death has been caused by their occupation)

The sur...

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...their deceased partner’s SERPS entitlement

This was due to reduce to 50% for deaths after 5 April 2000 under changes made by the Social Security Act 1986. However, because the Government did not communicate these changes properly, the reduction was instead phased-in between 6 October 2002 and 6 October 2010

The inherited SERPS proportion steps down by 10% a year from 100% for those reaching State Pension Age before 6 October 2002 to 50% for those reaching State Pension Age after 5 October 2010

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

Entitlement to inherited SERPS or S2P generally only arises from State Pension Age but can arise earlier for those eligible for Widowed Parent’s Allowance.

A tax-free bereavement payment is paid subject to what conditions?

 

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Over the years there has been various additional state pensions designed to supplement the Basic State Pension. The details have changed several times but they have all been based on the principle that the benefits provided should be linked to the level of National Insurance contributions paid or the earnings on which they were based.

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 the Basic State Pension. It was also the first State pension scheme to offer the facility to contract-out.

The SGPS operated from 6 April 1961 to 5 April 1975.  The scheme worked by providing a unit of pension (each unit is 12.79p per week in 2013/14) payable from State Pension Age (SPA) for every £7.50 contributed by a man or £9 contributed by a woman. The maximum number of units that could be purchased was 86 for a man or 72 for a woman, although since April 2010 women’s SGPS pensions are calculated the same way as men’s. The maximum benefit payable from the SGPS is therefore less than £10 a week and most people’s benefits are well below this, from 2011/12 SGPS in payment rises in line with the CPI. Prior to this, they have risen in line with the RPI.

Those contracted-out of the SGPS built up Equivalent Pension Benefit (EPB) under their private pension scheme in lieu of the SGPS benefit. EPBs were either frozen or bought back into the SGPS as at 6 April 1975. Either way the benefits are now virtually ...

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...me.

The DWP originally estimated that the final flat rate S2P structure would be reached in 2031/32. However, current estimates predict that this is now not likely to occur until around 2040.

As a further aid to the low paid, anyone earning at least the LEL but less than the LET will build up S2P pension as if they earned the LET. Similarly ‘carers’, those entitled to Invalid Care Allowance, Child Benefit for a child under 6 or Home Responsibilities Protection (HRP) will be treated under S2P as if they earned the LET even if they have no earnings. From April 2010, HRP has been replaced with a system of weekly credits for individuals taking time off work to raise children up to age 12 or who spend at least 20 hours a week looking after a severely disabled person.

S2P was to eventually become a second tier flat rate State pension. It would be of most importance to individuals earning up to the LET. By a rather circuitous route, the result would be very similar to an increased Basic State Pension, with the major differences being that it will only be linked to prices whilst in payment and will be unavailable to the self-employed.

This however, will not ultimately come to pass as the current Government have announced that they will be pressing ahead with a single-tier State Pension of around £144 from April 2016. This will mean the end of the basic State pension, the three additional State pensions and the guarantee element of the State pension credit.

State the original aim of SERPS.

 

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Contracting out of S2P can or could have occurred in 1 of these 3 ways:

Using a defined benefit scheme i.e. a contracted out salary related scheme (COSRS) where the decision to contract out is made by the sponsoring employer. Both the employer and employee pay lower NICs, and in return the scheme must provide a certain level of benefits;

Prior to 6 April 2012, using a defined contribution occupational scheme i.e. a contracted out money purchase scheme (COMP) where the decision to contract out is again made by the employer. NICs are reduced and it is the employer’s responsibility to pay this NIC flat rate rebate into the scheme. There is also an age related rebate which is paid directly into the scheme at a later date;

Prior to 6 April 2012, using a personal pension or stakehol...

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...heir fund that would have been built up as protected rights.

The Pensions Act 2007 did not recommend that contracting out should be abolished for defined benefit schemes, although with the introduction of the single-tier pension in April 2016, contracting out via defined benefit schemes will also disappear as the State Second Pension will then be closed. This has been confirmed by the inclusion of a clause in the Pensions Bill 2013 that will bring to an end contracting out via a defined benefit scheme with effect from April 2016. The likelihood is that this will result in an increased rate of closure of defined benefit schemes, though this remains to be seen.

From 6 April 2012 how many different ways are there to contracting out of S2P?

 

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In April 1999, the Government introduced the Minimum Income Guarantee (MIG). Having been criticised for reducing the incentive to save for retirement the MIG was replaced by The State Pension Credit (SPC) on 6 October 2003.

Both benefits were intended to fight poverty by guaranteeing a minimum income for those in retirement. The SPC is also designed to reward people for making some retirement provision of their own rather than relying entirely on the State.

The SPC comprises 2 distinct components:

The guarantee credit

This almost directly replaced the MIG, guaranteeing a minimum income level (£145.40 for an individual and £222.05 for a couple in 2013/14) for those aged 60 or over. The qualifying age was to gradually increase fro...

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...which previously matched the Basic State Pension, would be linked to earnings, creating a gap between the two. From 2015 the maximum level of SC would be frozen in real terms. As a result by 2050 the proportion of pensioner households eligible for SC and/or GC will only be approximately 30% against current projections estimating a figure of more than 75%. In any event only 2/3rds of those eligible are expected to claim any benefit. The White Paper’s rationale for the cutback in SC was the increased value of benefits that will accrue to the lower-paid under S2P.

Explain how the State Pension Credit rewards a single person who has managed to accumulate some level of savings towards their retirement.

 

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