Pensions and Retirement Planning Learning Outcome 4 By the end of this learning outcome you will be able to demonstrate an understanding of the structure, relevance and application of the State Schemes to an individual’s pension planning.
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4.0 Overview of State Provision For individuals who reached State Pension Age before 6 April 2016: State pension provision includes:
The state pension age for men is currently 65 years old. For women it is between 60 and 65, depending on their birthdate. By 2018 it will be 65 for all and by 2020, 66 for all. The Department of Work and Pensions (DWP) can provide an individual with a state pension forecast (a BR19) including their entitlement to the BSP and any additional state pensions they are entitled to. They can provide information on: • • • • • •
The number of qualifying years recorded so far An estimate of the current value of any state pensions An estimate of the future value of any state pensions assuming NICs continue How much their pension would increase by if they defer it How they could improve their BSP with Class 3 NICs Information on whether they can improve their state pensions by using their late or former spouse’s NICs
For individuals reaching State Pension Age on or after 6 April 2016, the new “SingleTier” State Pension system will apply. Let’s take a look at this provision in more detail.
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4.1 The basic state pension (BSP) BSP Who could have one?
Recipients of a full BSP needed to have 30 years worth of NICs (National Insurance Contributions) on their contribution record. Entitlement to BSP could be earned by the employed and self employed as well as credited to certain other individuals. Credits were given in some circumstances e.g. where an individual is unemployed, claiming maternity or sick leave, for unemployed men under state pension age, but over the state pension age of a woman with the same date of birth. Credits were also given to children aged 16 – 18 or to those over 18 and on a full time approved training course. Those who took time off to raise family where they are claiming child benefit for a child under the age of 12 or those supporting elderly or sick relatives who receive income support for doing so also got credits.
BSP cont… How much is it?
For 2016/17, an individual entitled to a full BSP receives £119.30 per week. The couples’ rate of pension is £190.80 a week. Since 6 April 2012, this amount increases annually by the higher of: • • •
Consumer Price Index (CPI) NAE 2.5%
CPI and NAE figures are taken from the preceding September. Other basic state retirement benefits include a Christmas bonus of £10, an additional 25p a week may be paid for those over 80, winter fuel payments of £200 per household where there is a pensioner under 80 and £300 per household where there is a pensioner over 80.
What happens if it is deferred?
The basic state pension can be deferred if an individual does not wish to or need to start taking it from their state pension age. An increased income will become available if they defer it for a minimum of 5 weeks at a rate of 0.2% per week, 1% per 5 week deferral, 10.4% per year. Once the pension starts being paid the deferral ends and the extra income is paid out, with income tax payable at the individual’s highest marginal rate. The additional income has no impact on their increased personal allowance. If the income is deferred for at least a year then the accumulated
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lump sum can be paid out. It will equate to the amount of pension they would have received plus interest of 2% above the Bank of England base rate. The lump sum is subject to income tax at the same level as the individual’s other income (not at their highest marginal rate). The lump sum has no impact on their increased personal allowance.
How is the BSP taxed?
The basic state pension is taxable but is paid gross and then any tax payable by the individual is deducted off other sources of income. The basic state pension is therefore added into an individual’s tax computation as their first slice of income. How the tax is paid depends on the other sources of income received by the individual:
What happens to it if someone moves overseas?
•
If they have other pension income then any tax due comes via an adjustment to their tax code.
•
If there is no other pension income but they have earned income, it is reflected in their PAYE amount.
•
If they have no other pension and no earned income then any tax due will be payable via self assessment.
Whilst the basic state pension can be payable to an individual living overseas, it will only be increased once in payment if they live in a country with a reciprocal social security arrangement, an EEA country or Switzerland. A list of the countries who have a reciprocal social security arrangement with the UK can be found at http://www.dwp.gov.uk/international/social-security-agreements/listof-countries/
4.2 State Death Benefits There are currently three main death benefits available from the state:
These are only available to those who are married or in a civil partnership on death. Let’s look at each in more detail:
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4.2.1 Widowed Parents Allowance (WPA) Individuals can get the taxable Widowed Parent's Allowance (WPA) if: •
Their late spouse or civil partner paid appropriate National Insurance Contributions (minimum one qualifying year, 90% of their working life to get the maximum), or if their death was caused by their job,
•
and they have one or more children for whom they receive (or could receive) Child Benefit, or they are a woman expecting their late husband's baby, or a baby as a result of fertility treatment whilst in a civil partnership,
•
and they were under state pension age when their spouse or civil partner died.
The benefit includes a basic allowance plus a further allowance for each dependent child and a possible additional SERPS/S2P pension. It will cease if the individual remarries, enters into a civil partnership or cohabits. 4.2.2 Bereavement Allowance Individuals can get the taxable Bereavement Allowance if: •
Their late partner paid appropriate National Insurance Contributions (as for WPA above) or their death was caused by their job,
•
and they were 45 or over when their partner died, but below the state pension age,
•
and they are not bringing up children,
•
and they do not get Widowed Parent's Allowance.
Bereavement Allowance is paid for 52 weeks from the date of death. The amount payable varies dependent on age widowed. It will cease if the individual remarries, enters into a civil partnership, cohabits or reaches state pension age. 4.2.3 Bereavement Payment The Bereavement Payment is a £2,000 tax-free lump sum paid to those under state pension age whose late spouse or civil partner (who must also have been under state pension age) made appropriate National Insurance Contributions (25 weeks payments in any one tax year), or if their death was caused by their job. 4.2.4 Bereavement Support Payment From 1 April 2017, Widowed Parent’s Allowance, Bereavement Allowance and Bereavement Payment are being replaced with a single Bereavement Support Payment.
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Where eligible, it’s expected that a bereaved individual will receive payments as follows: - To someone with dependent children, a £5,000 lump sum followed by 12 monthly instalments of £500. - To someone without dependent children, a £2,500 lump sum followed by 12 monthly instalments of £250. These payments are not expected to be subject to income tax. 4.3 Additional State Retirement Benefits There were three additional state retirement pensions: • • •
State Graduated Pension Scheme State Earnings Related Pension Scheme (SERPS) State Second Pension (S2P)
Let’s look at each in turn: 4.3.1 State Graduated Pension Scheme Key points regarding the State Graduated Pension Scheme •
In force April 1961 – April 1975.
•
For every £7.50 paid by a man and £9 paid by a woman, an additional pension unit of 11.53 pence per week would be received at retirement.
•
Payable from state pension age.
•
For those who contributed the maximum amount, the most they now get is around £10 extra per week for men and £8 extra per week for women. (N.B. Women reaching SPA after 5 April 2010 have their Graduated Pension calculated on the same basis as a man).
•
50% pension paid to surviving spouse or civil partner on death.
4.3.2 State Earnings Related Pension Scheme (SERPS) Key points regarding the State Earnings Related Pension Scheme •
April 1978 – April 2002.
•
Only employed individuals who paid Class 1 NICs were eligible.
•
Payable from state pension age.
•
The amount originally payable was based on earnings between a specified lower and upper earnings limit known as ‘middle band earnings’.
•
Individual’s received a pension of 25% of their middle band earnings in the best 20 years earnings of their working life.
•
This later changed to 20% of their lifetime earnings to reduce the cost of the scheme.
•
Please see overleaf for the amount payable on death.
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Although this was first introduced in the Social Security Act 1975 it did not come into force until 1978. 4.3.2.1 Inheriting SERPS or S2P A surviving spouse or civil partner of an individual entitled to a SERPS or S2P pension will receive a % of their pension. The % they receive will depend on when their deceased spouse would have reached state pension age (SPA) by as follows:
Deceased would have reached SPA by 5.10.02
Deceased would have reached SPA post 5.10.02
Deceased would have reached SPA post 6.10.12
Please note, from 6 April 2016, it will not be possible for individuals to increase their State Pension following the death of a spouse/partner in respect of their entitlement to the Single-Tier State Pension, i.e. it is no longer possible to inherit State Pension benefits following the death of a spouse/partner. 4.3.3 State Second Pension (S2P) S2P replaced SERPS from April 2002. It was designed to help those who are lower or non- earners and therefore unlikely to make any additional provision for themselves. Those eligible included •
Employees
•
Carers earning under and the lower earnings limit who: -
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Individuals eligible for incapacity benefit or severe disablement allowance
•
S2P is payable from state pension age. 4.3.3.1 How the State Second Pension (S2P) built up The amount payable was based on how much an individual ‘accrued’ (built up) under their S2P over time. For 2015/16, if you had earnings above the LEL (£5,824 – 2015/16), you accrued a flat rate of £93.60. Additionally, a further 10% of any earnings between the low earnings threshold (£15,300 – 2015/16) and the upper accrual point (£40,040 – 2015/16) tax year were taken into account for S2P purposes. 4.3.4 Contracting Out Contracting out is when an individual withdraws from the additional state pension provision. From 6 April 2012 this could only be done by members of defined benefit schemes, known as a Contracted Out Salary Related Scheme (COSRS). Under a COSRS the employer made the decision for all scheme members to contract out. The employer had to offer guarantees that certain benefits will be paid. In 2015/16, the last year that it was possible to contract out in the UK, the employee and the employer paid lower NICs, a reduction of 1.4% and 3.4% respectively on earnings between the earnings threshold and UAP. Employees also got a rebate of 1.4% on earnings between LEL and Primary Earnings Threshold. Employers also got a rebate of 3.4% on earnings between LEL and Secondary Earnings Threshold. With the introduction of a single-tier state pension from 6 April 2016, it will no longer be possible to contract out in the UK, even under a COSRS. (However, it is still possible to contract out under a COSRS in the Isle of Man). 4.4 Pension credit All figures relate to the 2016/17 tax year. When calculating entitlement to Pension Credit, savings below £10,000 are ignored. Savings above £10,000 are deemed as providing "income" of £1 per week for every £500 or part £500. Pension Credit entitlement is then reduced by subtracting the "deemed savings income". Other income is taken into account or disregarded as follows: Taken into account • • • • • • •
Disregarded • • • •
Pensions Working tax credit Earnings from employment Earnings from self-employment Savings ‘Income’ from investment bonds Most Social Security benefits
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The value of investment bonds are ignored providing they have a specified death benefit. There are two elements to the credit. 4.4.1 Pension credit – the guarantee credit The guarantee credit aims to give everyone a minimum level of income in retirement. Previously it could be claimed from the age of 60. This is now in the process of increasing to age 65 in line with the increase in state pension age for women. In the 2016/17 tax year the guarantee credit is worth £155.60 per week to an individual and £237.55 per week to a couple. For a couple, the individual applying for the guarantee credit must have reached the minimum age for claiming, but their partner need not. 4.4.2 Pension credit – the savings credit Please note, only those who reached State Pension Age before 6 April 2016 are potentially eligible for the savings credit element of the pensions credit. Pensioners aged 65 or over get an additional amount, known as the savings credit where they have made private retirement provision during their working lives. This can be up to £13.07 per week (single) or £14.75 per week (couple). The level of additional benefit payable will depend on the actual income that individuals have over and above the savings credit threshold, The Savings Credit Threshold is £133.82 per week for an individual and £212.97 per week for a couple. For each one pound of income over this threshold, the savings credit will pay an additional 60p of benefit. The maximum savings credit is 60% of the income between the savings credit threshold and the guarantee credit. If the individual's (or couple's) income exceeds the guarantee credit then the entitlement to the savings credit will be reduced by 40p for each £1 of income over the guarantee credit until the additional savings credit payable is zero The following examples help to demonstrate this: Example 1 Joan, aged 67, has savings of £14,000 in her local building society and receives an income of £130 a week. How much Guarantee Credit and how much Savings Credit does she get each week, if any? Step 1: Work out her total income
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£130 pw actual income + deemed income of £8 i.e. (£14,000 - £10,000) £500 = £138 pw total income Step 2: Work out the difference between Guarantee Credit ceiling and total income £155.60 pw - £138.00 pw £ 17.60 pw Guarantee Credit Step 3: Deduct Savings Credit threshold from total income and multiply by 60% £138 - £133.82 * 60% = £2.51 pw Savings Credit A total Pension Credit payment of (£17.60 + £2.51) £20.11 a week.
Example 2 Joshua, aged 68, has savings of £24,000 and receives an income of £130 pw. How much Guarantee Credit and how much Savings Credit does he get each week, if any? Step1: Work out his total income £130 pw actual income + deemed income of £28 i.e. (£24,000 - £10,000) £500 = £158 pw total income Therefore no entitlement to Guarantee Credit as total income exceeds Guarantee Credit ceiling of £155.60 Step 2: Deduct Savings Credit threshold from total income and multiply by 60% (£158.00 - £133.82) * 60% = £14.51 pw. This is restricted to the maximum savings credit of £13.07. Step 3: Deduct Guarantee Credit ceiling from total income and multiply by 40% (£158 - £155.60) * 40% = £0.96 pw This gives a reduced Savings Credit of £13.07 - £0.96 = £12.11 pw savings credit
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For people who reach State Pension Age on or after 6 April 2016 (men born on or after 6 April 1951 and women born on or after 6 April 1953) the new Single-Tier State Pension will apply. Please note, if a person reached State Pension Age before 6 April 2016 but deferred taking their State Pension benefits, when they do come to take benefits their entitlement will still be to the former, pre 6 April 2016 system. In other words, they cannot opt to receive benefits under the new Single-Tier State Pension. The full level of the new State Pension has been set at £155.65 a week for the 2016/17 tax year. In order to qualify for the full amount, a person will need 35 “qualifying years” (a year in which a person paid NI Contributions or received NI Credits). To be eligible for any State Pension a person will need at least 10 qualifying years. Each additional qualifying year will add approximately £4.45 a week to their State Pension (i.e. £155.65/35). It’s anticipated that the Single-Tier State Pension will increase in payment under the same triple lock guarantee that applies to the Basic State Pension – i.e. the greater of CPI, NAE or 2.5%. As for the Basic State Pension, it will be possible to defer taking the Single-Tier State Pension benefit from State Pension Age. The minimum deferral period is 9 weeks, and the rate of increase during deferral will be 1% for every 9 weeks deferral – the yearly equivalent of which is approximately 5.8%. A lump sum in respect of the deferred payments will not be available. For further details in respect of the Single-Tier State Pension, please refer to the R08 module “Pensions Update Programme” from the technical knowledge home screen.
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Pensions and Retirement Learning Outcome 4 (PEN4) – End of Module Test Multiple Choice Questions Question 4.1 From 6 April 2012 the basic state pension will increase in payment by:
Answer A. The greater of RPI, NAE or 2.5% B.
The greater of CPI, NAE or 3%
C.
The greater of RPI, NAE or 3%
D.
The greater of CPI, NAE or 2.5%
4.2 Bev, who reached SPA on 1 April 2016, has been told that she qualifies for a retirement income paid by the state even though she has not made sufficient NICs to claim a state pension in her own right. This is known as:
A.
Graduated Pension
B.
Basic Pension
C.
Category B Pension
D.
SERPS Pension
4.3 Denise and Tom are about to start receiving their state pensions. Denise has been offered a lump sum as well as a regular income. Tom will receive an income only. This indicates that:
A.
Denise could have taken her state pension earlier, but deferred it.
B.
Tom has commuted part of his state pension to Denise for tax purposes.
C.
Denise was contracted in to S2P but Tom was not.
D.
Tom has fewer than 30 qualifying years of national insurance contributions.
A.
BSP only
B.
BSP and SERPS only
C.
BSP, SERPS and S2P only
D.
BSP, Graduated Pension Scheme, SERPS and S2P
4.4 Simon is 68 and has been continuously employed since he was 16 years old. Which state benefits will he be entitled to?
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4.5 In order to qualify for the maximum Single-Tier State Pension, how many qualifying years are required?
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A.
35
B.
40
C.
10
D.
30
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Answers Question 4.1 From 6 April 2012 the basic state pension will increase in payment by:
Answer The greater of CPI, NAE or 2.5% D
4.2 Bev, who reached SPA on 1 April 2016, has been told that she qualifies for a retirement income paid by the state even though she has not made sufficient NICs to claim a state pension in her own right. This is known as:
C
Category B Pension
4.3 Denise and Tom are about to start receiving their state pensions. Denise has been offered a lump sum as well as a regular income. Tom will receive an income only. This indicates that:
A
Denise could have taken her state pension earlier, but deferred it.
4.4 Simon is 68 and has been continuously employed since he was 16 years old. Which state benefits will he be entitled to?
D
BSP, Graduated Pension Scheme, SERPS and S2P
4.5 In order to qualify for the maximum Single-Tier State Pension, how many qualifying years are required?
A
35
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