7 - State Pension

Question 1

Who gets the new and old version of state pension?

Answer 1

If you reached state pension age before April 2016 you get the old version.

Question 2

What was the basic rate of the old SP?

What is it’s proper title?

Answer 2

Ini 17/18 it’s £122.30 pw, called category A.

Question 3

How many years service were required for full basic SP (old method)?

Answer 3

1/30th was accrued for each full year worked, so 30 years.

Question 4

What is the growth rate of the old SP?

Answer 4

Triple Lock - max of 2.5%, CPI and earnings growth

Question 5

What is the category B state pension?

Answer 5

A lower rate of £73.30pw for a dependant (spouse, civil partner) who had less than 18 years service themselves, based on their partners NIC record.

Get the full amount if the “working” partner has a full entitlement to category A, otherwise they get the same percentage as the “working” partner is getting.

Question 6

What are the components of additional state pension?

In which years were they accrued?

Answer 6

• Graduated Retirement Benefit (GRB): 1961-1975;
• State Earnings Related Pension Scheme (SERPS): 1978-2002;
• State Second Pension (S2P): 2002-2016.

Question 7

How was eligibility for the additional state pension determined?

Implication for a particular group of people?

Answer 7

Based on class 1 NICs for employees, with S2P also based on credits due to benefits received.

Note that self employed people don’t pay class 1 so were not entitled to additional state pension.

Question 8

How did contracting out work?

Answer 8

You paid lower NICs but didn’t accrue additional state pension benefits.

Note that after April 2016 NIC contributions for contracted out employees were increased.

Question 9

What do you receive if reaching SPA after April 2016?

Answer 9

The single tier state pension.

Question 10

Single-tier state pension

Requirement to qualify

Requirement to receive full amount

Full rate of payment and growth rate

Additional state pensions

Answer 10

You need a minimum of 10 years service to get any state pension, but 35 qualifying years to receive the full amount.

Full payment is £159.55 pw, with the government intending it to grow with the triple lock (greater of 2.5%, CPI and earnings growth).

A higher state pension may be paid if the individual accrued additional state pension benefits before April 2016.

Question 11

What is the foundation amount and implications?

Answer 11

The foundation amount for people below SPA on 6/4/16 was the higher of their entitlement under the new and old systems.

If it was above the full single tier pension rate (£155.65pw) the excess would be a protected amount, which would grow with CPI and be added to their state pension when they reach SPA. They can’t purchase additional years after 6/4/16.

If it was below they would have the opportunity to purchase additional years of entitlement after 6/4/16.

Question 12

How is the foundation amount calculated?

Answer 12

Foundation amount is the higher of entitlement built up under the old system on 6/4/16 and the below calculation based on the new system:

Take the number of qualifying years up to 6/4/16 (up to 35 years maximum) and divide by 35 years, then multiply that proportion by £155.65.

Note that if they were contracted out at some point there may be a “rebate derived amount” to be deducted from this.

Question 13

Who is likely to have a high or low foundation amount?

Answer 13

Only people who were below SPA on 6/4/16 have a foundation amount.

It is likely to be high if you were fairly close to retirement and had built up entitlement to additional state pensions.

It is likely to be low if you haven’t been working for long.

Question 14

What are class 3 NICs?

Timing

Rate

Answer 14

Class 3 NICs are paid to top up your NIC record to increase entitlement to state pensions.

They should be made within 6 years of the year you’re paying for, although the rate goes up if it’s more than 2 years later. You can pay after reaching SPA, but only for years from before you reached it.

Rate is £14.25 pw.

Question 15

What are class 3A NICs?

When were they available?

Answer 15

Only available for a brief time between 2015 and 2017, they allowed you to purchase entitlement to additional state pension benefits.

Question 16

What is state pension deferral and when can it be done?

Answer 16

This is putting off the receipt of your state pension for a period.

It can be done at the point it starts to become payable, or even several years later.

However you can only do it once in your lifetime.

Question 17

2 groups of people whose deferral rules are different

Answer 17

• Individuals resident outside the UK (or EEA) cannot defer their state pension once it is already in payment;
• Some inviduals can’t gain increases in state pension due to deferral, including where they have spent time in prison due to conviction of a criminal offence or being in receipt of certain benefits (eg universal credit).

Question 18

What deferral benefits do people who reached SPA before 6/4/16 accrue?

What if they die?

Answer 18

• If taken as income they get 1% higher income level for every 5 weeks their state pension is deferred (need a minimum of 5 weeks before they get anything);
• If they defer for over 12 months they can choose a lump sum instead, equal to the amount of state pension they have forgone grown with weekly compound interest at 2% over base rate.

Spouse will get the lump sum if they die (subject to meeting DWP conditions).

Question 19

What deferral benefits do people reaching SPA after 6/4/16 receive?

What if they die?

Answer 19

• As income they get 1% every 9 weeks and need a minimum of 9 weeks deferral to get anything;
• No option to receive a lump sum;
• Spouse receives nothing on death.

Question 20

Tax treatment of state pension

Deferral lump sum treatment

Answer 20

State pension is never taxed directly, but is part of taxable income.

If you receive other income your PAYE will be adjusted to take into account the state pension income.

Otherwise you will be assessed via self assessment if you have any tax to pay (i.e. other income taking you over personal allowance).

The deferral lump sum is also taxable, but cannot take you into a higher tax bracket. So if you are within your personal allowance when you receive it, it is entirely tax free.

Question 21

Do you still receive UK state pension if resident overseas?

Answer 21

The state pension will be paid even if you are resident overseas.

However you will only receive growth in your pension whilst resident in the UK, EEA, Switzerland or certain other countries with reciprocal social security agreements.

Question 22

What death benefits are payable by the state?

Tax treatment, income or lump sum?

Who are they payable to?

Answer 22

Those who died pre April 2017 had:

• Widowed Parents Allowance (WPA) - Taxable, weekly income;
• Bereavement payment - Taxable, weekly income;
• Bereavement allowance (if deceased had no SP) - Tax free, £2k lump sum.

Now you can receive only Bereavement Support Payment (tax free).

These payments are all to widow(ers) under SPA

Question 23

Amount of bereavement support payment

Tax Treatment

Who gets the higher level?

Answer 23

Higher and standard amounts in tax tables - TAX FREE.

Higher rate payable if the widow is pregnant at time of death, and in support of child benefit.

Question 24

Requirements for bereavment support payment

Answer 24

• Deceased must have paid class 1 or 2 NICs for at least 25 weeks of any tax year in their life, OR they died as a result of a job related accident/illness; and
• Survivor under SPA and lives in the UK (or a country with bereavement payments). Also they can’t be in prison.

Question 25

Timing for application for bereavement support payment

Answer 25

• All payments made if claimed within 3 months of death;
• Initial payment still made if claimed between 3 months and 12 months of death;
• Monthly payments can’t be backdated for more than 3 months (so every month the claim is delayed after 3 months costs you 1 month of income).

Question 26

What can a widow claim of deceased SERPS and S2P benefit?

Answer 26

SERPS: A percentage of the benefit depending on when the deceased was born (100% for men/women born before 1937/1942, stepping down to 50% for men/women born after 1945/50).

S2P: 50%.

Question 27

What is pension credit?

2 types

Answer 27

This is a basic level of pension paid to people without NIC accruals.

Types are Guarantee Credit and Savings Credit.

Question 28

What is the guarantee credit?

Ages

Answer 28

Guarantee credit tops your income up to a guaranteed level (£159.35 individual, £243.25 couple).

Used to be minimum age 60 but rising in line with womens SPA. Based on age of the individual claiming, doesn’t matter if your partner is younger than the minimum age.

Question 29

What is savings credit?

Answer 29

A small top up for people who have made some effort to save in their life.

Only for people reaching SPA before April 2016, who were receiving it at that time, are over 65 and continue to be eligible for it.

Amount is £13.20 pw individual, £14.90 for a couple.

Question 30

How is income calculated for pension credit purposes?

Answer 30

Earnings and pension income (including state pension), plus assumed interest on any savings over £10k at a rate of 0.2% per week (referred to as £1 for every £500 or part thereof).

Question 31

What are the investment profiles of the different risk classes?

Answer 31

• No risk: Cash and short term fixed income.
• Low risk: High proportion in cash or guaranteed investments.
• Medium risk: Reasonable proportion in asset backed investments, very small amount in higher risk funds.
• Medium/High risk: Mostly asset backed, very little in mixed (managed/with profits) funds. Significant amount outside the UK and 10-20% in higher risk funds.
• High risk: Little or no mixed funds, comforable with high risk funds (i.e. >20%), individual shares or commercial property.