Pension funding options

Covers:

State death benefits and

Contracting out

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 or 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)

The individual is an unemployed man, under age 65, who has at least reached the State Pension Age of a woman with the same date of birth

Individuals born since April 1957 who were in full time education between the ages of 16 and 18. Credits are not given for years spent at university, though if over 18 and on a full time approved training course of a technical, vocational or rehabil...

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... 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 from April 2011.

 

Answer : Purchase course for answer

At present, the State Pension Age (SPA) is 65 for men and 60 for women. However under plans drawn up by the previous Government, since April 2010, the SPA for women started gradually being increased from 60 to 65 for those retiring between 2010 and 2020.

The Pensions Act 2007 also contained legislation to increase the SPA to 66 in the two years from April 2024, 67 in the two years from April 2034 and 68 in the two ...

Shortened demo course. See details at foot of page.

...il 2016 and November 2018 so it is the same as men’s, and both men and women’s SPA will then increase together at the same rate to age 66 by April 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.

 

Answer : Purchase course for answer

There are 4 types of NI contribution:

Class 1 contributions

These are paid by employees on earnings above the primary contribution threshold (£110pw for 2010/11, £139pw for 2011/12) and by employers above the secondary threshold (£110pw for 2010/11, £136pw for 2011/12). The employer’s main NI rate is 12.8% for 2010/11 and 13.8% for 2011/12. Employees pay a main rate of 11% on earnings up to the Upper Earnings Limit ...

Shortened demo course. See details at foot of page.

...rate of 8% in 2010/11 and 9% in 2011/12. A further 1% is payable on profits above £43,875 per year in 2010/11 and 2% on profits above £42,475 in 2011/12.

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?

 

Answer : Purchase course for answer

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 subjec...

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...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?

 

Answer : Purchase course for answer

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 is11.53p per week) 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 worthl...

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... by a flat monetary amount, linked to earnings increases (this will be £1.40 per week pension for a year’s S2P membership in 2006/07 terms). 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 will 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 may, however, not ultimately come to pass should the Government go ahead with a Universal State Pension of £140 per week that it is currently giving serious consideration to.

State the original aim of SERPS.

 

Answer : Purchase course for answer

Individuals and pension schemes can currently contract out of S2P just as it was possible to contract out of SERPS. Contracting out can occur in one of three 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;

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 re...

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...t pensions to defined contribution schemes, a move that would put an end to the vast majority of pension transfers out of defined benefit schemes. The reasoning behind the move was that it was thought that doing so would simplify the pensions system for employers, individuals and State departments and bring much needed extra revenue to the Treasury. However, in early December 2010 after much lobbying by the pensions industry, the Government decided not to proceed with the pension transfer ban as it would ‘be inconsistent in policy and run counter to our overall pension simplification agenda’.

State the type of arrangement that is used to contract out of a defined benefit scheme.

 

Answer : Purchase course for answer

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 replaces the MIG, guaranteeing a minimum income level (£137.35 for an individual and £209.70 for a couple in 2011/12) for those aged 60 or over. The qualifying age was to gradually increase from 60 to ...

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...shold for SC 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.

 

Answer : Purchase course for answer