Chapter 7 (4 marks) - The State Pension

Question 1

The State Pension system underwent a major overhaul (simplification) in 2016.

Under the old State Pension system there were three bottom State Pensions known as ‘earnings-related’ state pension schemes and the basic state pension (therefore if u are old enough, and meet the requirements your pension could be made up of all 4 elements)

Now benefits are made up of only the single tier statement pension and protected payments (for benefits prior 2016)

Answer 1

SEE TOP OF 7.1 for more info

Question 2

Were there different types of basic state pension payments (ie statepension before 2016 reforms)?

MOST LIKELY TO OPO UP IS CATEGORY A AND B. This may still come up even though it is the basic state pension

Answer 2

Category A
Here the pension paid was based upon the individual’s own NICs record. So, an individual accrued 1/30th of the full basic state pension for each year they contributed, or were credited with, NICs. They therefore needed 30 years’ NIC record to receive a full Category A pension.

Category B
A category B pension was where a spouse or registered civil partner used their partner’s NICs record to claim a top-up to their own basic state pension. They must have had less than an 18-year record in their own right to qualify, and could have claimed a maximum of 60% of their spouse / RCP’s category A pension as a top-up of their own category A pension.

Both the claimant and the individual whose record was being used as part of the claim must have reached SPA for a category B state pension to be paid historically.

Category C
This was a basic state pension paid to men who were over state pension age in 1948 and, on their death, to their widows. Funnily enough, there are not many of these in payment now (if any!).

Category D
This was paid either to individuals aged over 80 who had no basic state pension, or a relatively small one.

Age addition payments
This was a 25p weekly top-up to individuals in retirement that were aged 80 and over! It was a non-contributory payment, so was not linked to NICs records.

MOST LIKELY TO OPO UP IS CATEGORY A AND B

Question 3

How much can an individual receive from the Single Tier State Pension?

This depends on the amount of NICs paid, or credited with having been paid. To receive the full Single Tier State Pension, a NICs payment record of 35 years is required. This is an increase from the 30-year requirement prior to 6th April 2016.

The current maximum Single Tier State Pension payment is £221.20 p.w.

If an individual does not have a full payment record, they will receive a proportion of the maximum available. Each qualifying year gives the individual an entitlement to 1/35th of the maximum BSP.

A minimum ten-year record is required to receive any BSP payment. This has increased from the one year minimum it used to be prior to 6th April 2016.

Question 4

NICs payments

As we have already mentioned NICs operates on a ‘pay as-you-go basis’.

Individuals of working age today pay their NICs, and these are used to make State Pension payments to individuals claiming their State Pension today.

Answer 4

There are four main classes of National Insurance: 1, 2, 3 and 4. There was also class 3a (12/10/15 – 5/4/17).

Question 5

Individuals of working age today pay their NICs, and these are used to make state pension payments to individuals claiming their state pensions today. There are no state pension assets or funds.

As less money is paid in via NICs, and more individuals claim their State Pension for longer, measures have had to be taken to reduce costs, such as pushing back state pension age (SPA) which we will consider shortly.

Question 6

Low earners (earning between the LEL and PT) have no Class 1 NICs liability but are still building up a state pension entitlement record for these tax years. This was introduced by a Labour government to help low earners.

Question 7

Class 3 NICs

These are voluntary NICs contributions, and are usually used by individuals to try and improve their state pension contribution record, with the objective of achieving the 30 / 35 years required for a maximum entitlement. The current Class 3 payment rate is £17.45 weekly.

These voluntary contributions must usually be made within 6 tax years of the year of an individual’s State Pension contribution shortfall. For example, you have until 5th April 2030 to make up for gaps for the tax year 2023/24.

To assist individuals, the government extended the timescales for payment of Class 3 NICs in relation to the tax years between 2006/07 and 2017/18 to 5th April 2025.

For the tax years 6th April 2006 to 5th April 2016. This only applies to a person who:

reaches State Pension age on or after 6 April 2016
is entitled to pay Class 3 NICs
Individuals can find out their entitlement in a number of different ways (covered shortly) and, if needed, can make up their record using Class 3 NICs.

Question 8

What are class 3a NICs?

Class 3a NICs were introduced in October 2015 to allow individuals to top-up their earnings-related state pension entitlements, such as SERPS and S2P, by up to £25 weekly. They were available to any individual reaching SPA before the introduction of the new Single-tier state pension in 2016.

Question 9

Some individuals do not physically pay NICs but receive ‘credits’ towards their state pension entitlement. We will consider such individuals and situations next.

NICs credits

The individuals who qualify include: (WHO)

Question 10

how is the Single Tier State Pension calculated?

Well, the answer, unfortunately, is not a straightforward one! We have to start with the calculation of an individual’s foundation amount.

SEE END OF 7.1
Let’s look at each of these four possible scenarios next. You need to be comfortable with each of these. Foundation pension, and your understanding of it, is commonly tested within the R04 exam. Calculation questions in your R04 exam however are rare, in terms of foundation amounts. It is more important to understand the principles rather than the maths in this area.

Answer 10

The foundation amount is the higher of entitlement to state pension prior 2016 or entitlement under new state pension rules

Whichever gives the higher of the two calculations above will be an individual’s foundation amount.

4 POSSIBLE SCENARIOS

Foundation amount is equal to the full Single Tier State Pension amount
Foundation amount less than the Single Tier State Pension
Foundation amount more than the Single Tier State Pension
Individuals with no pre-April 2016 NICs record

How do we establish an individual’s foundation amount in detail?

There are two possible methods: one for individuals that have never been contracted out, and one for those that have.

Question 11

If an individual has a foundation amount more than the Single Tier State Pension

Individuals most likely to find themselves in this position are likely to be older workers who have worked many years and not contracted out

Such individuals will receive the maximum Single Tier State Pension plus have a ‘protected amount’ on top. Any further payments of NICs will not increase their State Pension as they are already entitled to more than the current maximum.

Answer 11

The protected payment increases inline with CPI (not triple lock!)

Question 12

Individuals with no pre-April 2016 NICs record

Such individuals will receive some Single Tier State Pension at SPA if they have a minimum NICs record of at least 10 years. They can accrue further Single Tier State Pension at 1/35th per year.

Answer 12

Obvs u cant calcualte the foundation amount for these individuals

Question 13

DO ACTIVITY 7.2 which is about foundation amounts

Question 14

The Pensions Act 2014 has introduced regular reviews of State Pension Age at least every six years.

Question 15

Class 1 2 & 3 NICS equally count towards the Single Tier state pension entitlement

Question 16

How does an individual physically claim their single-tier state pension?

They complete the relevant form and send it in to the DWP. If they wait for their pension to start to be paid automatically, they will be waiting a long time!

To remind people, HMRC send a letter no later than 2 months before you reach State Pension age, telling you what to do.

Question 17

How does an individual know what they will receive as a single-tier state pension?

There are now a number of different ways of finding out this information, including:

going through ‘Gov UK Verify’
This is the Government Gateway site. Individuals will require their User ID and password and can then progress to an individual confirmation of their state pension.
by phone or by post
Individuals can call the Future Pensions Centre and ask for a state pension statement.
completing form BR19
A statement will be issued within 10 working days.
Whichever method is used, your state pension statement will tell you how much state pension you have built up so far based on your NICs record.

Question 18

Features and options of the single-tier state pension

Question 20

7.2.1: State pension taxation

For income tax purposes, the state pension is classed as earned income (non-savings).

It is therefore taxable income for UK residents; however no income tax is usually deducted from state pension payments.

If any tax is due, it will be collected from other income the client has, using one of three options, depending on their circumstances and other income sources:

through an adjustment in the individual’s tax code.
through an employer’s PAYE system (individual is still working).
through self-assessment.
Non-resident individuals living in a country with a UK double taxation agreement will pay no UK tax but will be taxed according to the laws of their country of residence.

Non-resident individuals living in a country without a UK double taxation agreement will pay UK tax but may also be taxed according to the laws of their country of residence.

Question 21

Inflation-proofing of any income in payment is known as escalation.

Question 22

7.2.2: Inflation proofing

Inflation-proofing of any income in payment is known as escalation.

Single tier and old basic state pension benefit from inflation-proofing, known as the Triple Lock. This means that state pensions will be increased in payment by the greater of:

earnings, measured by the National Average Earnings Index (NAEI).
prices, measured by the Consumer Prices Index (CPI).
a fixed annual rate of 2.5%.
In practice, this process measures the changes over a 12-month period running from July to July for earnings and September to September for CPI.

The highest percentage is then applied to state pension payments from the following
6th April.

The Single Tier and old Basic State Pension increased by 2.5% in 2021 because of the Triple Lock. From April 2024 it increased by a whopping 8.5% due to high inflation rates!!!

Other state pensions escalate in line with CPI only.

Answer 22

Do example 7.5

If an individual is permanently resident abroad, they will only receive escalation increases (inflation proofing) on top of their basic entitlement if they:

live in the UK a minimum 6 months in a tax year (so are classed as UK resident).
reside in an EEA state or Switzerland.
reside in another country with a reciprocal DWP agreement with the UK.

If they live outside these parameters they will receive a level state pension payment which does not include any Triple Lock Increases

Question 23

The UK State Pension can be paid to individuals either living in the UK or abroad.

If an individual is permanently resident abroad, they will only receive escalation increases (inflation proofing) on top of their basic entitlement if they:

live in the UK a minimum 6 months in a tax year (so are classed as UK resident).
reside in an EEA state or Switzerland.
reside in another country with a reciprocal DWP agreement with the UK.

Question 24

7.2.4: State pension deferral

When an individual reaches their SPA, they do not have to take their State Pensions, but can defer payments.

Two sets of rules for this. Pre-2016 deferral options & post April 2016 options

How does this work?

THESE ARE POPULAR EXAM QUESTIONS

Answer 24

PRE april 2016 - 2 deferral options
Either take lump sum or higher future statepension payments in future.

From 6th April 2016 - 1 deferral options
State Pension deferral now has only 1 option which is receiving an increased pension in payment.

Specific rules/characteristics apply to each option so learn as exam questions are common. See 7.2

FOR CONTEXT:
The previous basis was viewed as being very generous, hence the changes that have been introduced.

The aim of the State Pension is to provide income in retirement. That is why the ‘lump sum in lieu’ option has been removed. It was too popular and did not achieve this aim.
Either pre or post rules can be examined, so make sure you are up to speed and comfortable with both.

Question 25

The rules on death of someone receiving their state pension or who has deferred their pension are different pre April 2017 and Post April 2017. What are the differences

Answer 25

State Pension death benefits up to 5th April 2017 -
These were broken down into three elements, one of which paid a lump sum, whilst the other two paid regular income payments. Bereavement Payment, Bereavement Allowance & Widowed Parent’s allowance. (unlikely to be examined but still learn)

State Pension death benefits from 6th April 2017 onwards

There is now one single payment known as the Bereavement Support Payment (BSP). Lump sum and income payments can be made, dependent on the status of the surviving individual putting in the claim. This benefit is assessed according to the claimant’s circumstances. It is broken down into where the survivor has: Children under 20 in education and No children under 20 in education.

Question 26

State Pension death benefits from 6th April 2017 onwards

There is now one single payment known as the Bereavement Support Payment (BSP). Lump sum and income payments can be made, dependent on the status of the surviving individual putting in the claim. This benefit is assessed according to the claimant’s circumstances. It is broken down into where the survivor has: Children under 20 in education and No children under 20 in education.

Answer 26

The amount paid depends on the circumstances of the surviving spouse or RCP. This relates, as stated above, to whether there are any children in full time education and their ages.

So, let’s look at the detail of each type of payment. Both are broken down into a larger initial payment, followed by up to 18 months of regular payments.

Survivor has children under 20 in full time education (known as ‘higher rate BSP’)

SEE 7.2

Survivor does not have children under 20 in full time education (known as ‘lower rate BSP’)

SEE 7.2

None of the above payments will affect the claimant’s other DWP benefit eligibility for the first year. This may not be the case once this initial period is over.

The surviving spouse or RCP has three months from the death of their spouse / RCP to claim their full entitlement, and up to 21 months to claim where they could receive less than their full entitlement.

Bereavement Support Payment regularly appears in the R04 exam…the figures above appear on your exam tax tables (so no need to memorise them!)

Question 27

If an individual dies, their spouse, or RCP may also be eligible for a pension from their SERPS or S2P entitlement.

Answer 27

Inherited S2P

In terms of inheriting some S2P on the death of a spouse or civil partner, this is a somewhat simpler calculation! The maximum that can be inherited is 50% of the deceased S2P entitlement.

So, for any individual who has died since 2010 the SERPS or S2P pension paid on their death, to a spouse or civil partner, is 50% of their entitlement.

Inherited SERPS

The percentage that a surviving spouse or RCP can inherit, ranges from 100% down to 50%. The entitlement depends on the date of birth of the deceased spouse or civil partner, as well as gender.

Rather than show the entire range of dates of birth (as these are unlikely to come up in the exam) here are some examples: see table

Question 28

What happens if the individual dies in a State pension deferral period?

Answer 28

Such payments will depend on several factors, including:

Was the individual single, married, or in a civil partnership at date of death?
Did death occur during or after a deferral period?
Which option was selected where deferral had been chosen?

Question 29

Bereavement Support Payment regularly appears in the R04 exam…the figures above appear on your exam tax tables (so no need to memorise them!)

Answer 29

Bereavement Support Payments are what surviving Spouses/Registered Civil Partners receive from statepension when spouse dies. 2 forms

The lower Bereavement Support Payment

The higher Bereavement Support Payment

What you get depends on age of any children/dependants and the point at which you claim (must be within 3 months to get full entitlement). It consists of a lump sum and regular payments for a set time period

Question 30

State pension is never taxed at source

Any tax due is through PAYE or self assessment

Question 31

Pension Credit was introduced on 6th October 2003.

Pension Credit is income and capital means-tested, but is not dependent on an individual’s NICs record.

Answer 31

Income means-testing

Income means-testing looks at weekly income levels, when assessing an individual’s claim for pension credit. The more weekly income you have, the less Pension Credit will pay you as a top-up.

Income can be broken down into 2 categories: included and excluded.

Included income

Included income is income that is fully taken into account in the Pension Credit assessment process.

This includes:

state, individual, and occupational pensions, including PPF and FAS payments.
It will also include any deferred income, such as the state pension, occupational scheme payments or possible withdrawals from drawdown pension.
maintenance payments received.
employed and self-employed income.
Working Tax Credits, and certain other DWP benefits, including Jobseekers Allowance and Carer’s Allowance.
regular payments from a trust.
equity release scheme regular payments.
Excluded income

Certain income is completely excluded from the income means-testing calculation.

This includes:

Adult Disability Payment, Attendance Allowance, Christmas Bonus, Child Benefit, Winter Fuel Allowance, Council Tax Reduction, Housing Benefit, Personal Independence Payment, and Disability Living Allowance

Capital means-testing

Next, we will consider the types of capital that are included and excluded, and then look at how capital means-testing is physically done.

Continued
What capital is included?

All cash deposits and investments.
Land and property (other than your main home) excluding any mortgages or loans.
The first £10,000 of any capital is also disregarded. This is the same amount for both a single and a married couple or RCPs.

Converting capital to a notional weekly income

As means-testing uses ‘weekly incomes’, any included capital above £10,000 must be converted into a notional weekly income amount, whether it generates income or not. Each £500 worth of capital is deemed to generate £1 worth of weekly income.

This calculation, if required, is always rounded up to the nearest £1.00 and equates to a 10.4% return. It would be nice if you could get that level of interest in the current economic climate…!

So, let’s look an example of this.

Question 32

Pension Credit was introduced on 6th October 2003.

Its benefits are a Guaranteed credit element and It used to contain a savings credit element. (Its now only the guaranteed credit part)

Tell me about the benefits received from pension credit currently.

DO CALCS IN 7.13

Answer 32

7.3.2: Guaranteed Credit

This component is designed to ensure all individuals, from SPA and above, have a minimum guaranteed amount of weekly income.

This guarantee used to be known as MIG (minimum income guarantee).

Since 6th April 2010, the age at which Guaranteed Credit can be claimed at has risen in line with changes in the SPA. Initially it was set to age 60. It has subsequently increased in line with changes in SPA.

The current minimum weekly income level is:

£218.15 for a single person
£332.95 for a couple

Both figures are in your exam tax tables, so you will be able to just look these up if required. Means testing will take place on any applciable capital and income amounts (look back at in 7.3 which could reduce the benefit amount.

If an individual or couple have income below these minimums, they will receive a top-up from Guaranteed Credit.

If income is already above these levels, no Guaranteed Credit will be paid.

In your R04 exam you are more likely to have a calculation in relation to a single person than to a married couple. But you never know…

Question 33

7.3.3: Savings Credit

NOW NOT INCLUDED IN PENSION CREDIT BUT READ AS SOME PEOPLE CAN STILL RECIVE TODAY

The Pensions Act 2014 abolished Savings Credit for individuals reaching SPA on or after 6th April 2016. (We still see the odd exam question on Savings Credit, but only in relation to the basics (usually!))

The maximum amount of savings credit that can be paid in 2024/25 is £17.01 per week for an individual and £19.04 per week for a couple.

Answer 33

What could come up in the exam in relation to Savings Credit?

A couple of areas in relation to Savings Credit are popular with the CII R04 examiner. These include:

Savings of more than £6,000 would start to reduce Savings Credit entitlement, over £16,000 and your credit was completely cancelled out by your debit. Nice and simples!
Carers historically received a higher payment, due to the inclusion of a Carer Premium or Addition.
Now back to Guaranteed Credit. We will consider a couple of calculations to help you understand how Guaranteed Credit works. Again, a complex calculation in unlikely to appear in your R04 exam, but understanding how Guaranteed Credit works is likely to be tested, and looking at some calculations, however complex they appear, will help with this (trust us – we know what we are doing!)

Question 34

1: An introduction to the State Pension

State pensions were introduced in 1908, but really came to resemble the current day scheme from 1948 onwards.
The State Pension used to be made up of four component parts: The Basic State Pension, Graduated Pension Scheme, SERPS, and S2P.
From 6th April 2016, we have solely the Single Tier State Pension.
State Pension entitlement will depend on several factors including: employment status, working life, earnings level, and being contracted in or out.
There are four classes of NICs: 1, 2, 3 and 4 plus between October 2015 and April 2017 we also had Class 3a.
Employees and employers pay Class 1.
The self-employed pay Classes 2 and 4.
Class 3 and 3a NICs are / were used to buy extra years in the State Pension scheme to build up an individual’s entitlement.
SPA has changed from being 60 for women and 65 for men, to being equalised at
age 66.
It is to be pushed back still further to age 67 and 68.
This starts to cover syllabus learning point:

7.1. Examine the structure, relevance and application of State Retirement Benefits and the Pension Credit framework as part of an individual’s pension planning

2: The Single Tier State Pension

There is now only one element to an individual’s state pension.
35 years NICs record is required for the maximum payment.
Nothing will be paid without a NICs record of at least 10 years.
An individual’s foundation amount must be calculated.
A deduction will be made for periods of contracting out.
A protected payment will be calculated for those who have historically accrued more than the weekly maximum of Single Tier State Pension.
This continues to cover the syllabus learning point:

7.1. Examine the structure, relevance and application of basic and additional state retirement benefits and the Pension Credit framework as part of an individual’s pension planning

3: Features and options of the Single Tier State Pension

The State Pension is taxable but never taxed at source.
Single Tier and old Basic State Pension benefit escalation is usually in line with the Triple Lock which can only be paid if the recipient is a UK or EEA resident, resident in Switzerland, or in another country that has a reciprocal UK DWP arrangement.
Death benefits consist of the Bereavement Support Payment. The amount paid is a combination of a lump sum and regular payments, dependent on the age of surviving children in full time education.
SERPS and S2P can still be passed on when an individual has died.
The State Pension can be deferred: historically either for a taxable cash lump sum in lieu or a higher income entitlement when it starts to be paid.
Since 2016, the only deferral option available is a higher income entitlement when payments commence.
This continues to cover the syllabus learning point:

7.1. Examine the structure, relevance, and application of basic and additional state retirement benefits and the Pension Credit framework as part of an individual’s pension planning
4: Pension Credit

Pension Credit used to be split into two components: Guaranteed and Savings Credit.
Both were income and capital means-tested, but the first £10,000 of capital is ignored.
Guaranteed Credit provides a minimum income guarantee for retired individuals.
Savings Credit rewarded individuals for saving, but then penalised them, by taking the additional award away, for saving too much.
Savings of more than £6,000 would start to reduce a Savings Credit entitlement, more than £16,000 and you would get diddly squat!
Carers could qualify for higher Savings Credit payments.
This finishes covering syllabus learning point:

7.1. Examine the structure, relevance, and application of basic and additional state retirement benefits and the Pension Credit framework as part of an individual’s pension planning.

Question 35

Paula has built up a higher State Pension entitlement than £159.55 per week. This means that Paula…

will have a Single Tier State Pension capped at £159.95.

will be able to accrue further Single Tier entitlement.

will have a protected amount increased by CPI.

will have a foundation amount increased by RPI.

Answer 35

will have a protected amount increased by CPI.

Paula will have a protected amount above her Single Tier State Pension. This will be revalued annually in line with CPI.

Question 36

Ellie receives a Single Tier State Pension and has savings of £17,000. This will mean that with regards to any entitlement to Pension Credit she:

is automatically entitled to Savings Credit.

will be income means-tested only.

is automatically entitled to Guaranteed Credit.

will be income and capital means-tested.

Answer 36

will be income and capital means-tested.

An individual’s entitlement to Pension Credit is subject to both income and capital means-testing.

Question 37

Jo wishes to defer her Single Tier State Pension. She can only do so if…

she has reached SPA.

she is within 12 months of SPA.

she has already deferred her State Pension.

she has reached SPA but not taken any income.

Answer 37

she has reached SPA.

Jo must have reached SPA to be able to defer. Once you start receiving your State Pension, you can still decide to stop it for a period if you want. You can only stop receiving your State Pension once.

Question 38

Michael is age 66 and has reached state pension age (SPA). Which of the following would affect his claim for Guaranteed Credit?

Personal Independence Payment.

Attendance Allowance.

Disability Living Allowance.

Pension Protection Fund payments.

Answer 38

Pension Protection Fund payments.

The three DWP benefits mentioned above do not count as income in a Guaranteed Credit assessment. Pension Protection Fund payments do.

Michael must have been a member of a DB scheme that was underfunded, and his sponsoring employer went bust. The scheme trustees then approached PPF for assistance and Michael is now being paid a scheme pension from this compensation scheme. This would reduce his Guaranteed Credit entitlement.