Amid continued confusion over the flat-rate system, industry experts offer their tips on making the most of an often-overlooked source of income
Despite recent moves towards individual responsibility for retirement provisions, the state pension remains a key foundation stone on which
later life is built for the vast majority of savers.
This means it is key clients and their advisers understand it fully. Yet a Freedom of Information Act request from Canada Life to the government reveals that it remains a difficult area to navigate.
Figures from the FOIA request centre on the new flat-rate pension that was introduced in April 2016 to simplify the system and make it fairer in the long run.
Yet it shows more than half of those eligible to claim the state pension under the new flat-rate system receive less than the full amount.
The data also shows 38 per cent of claimants, or 365,290 pensioners, receive less than £150 a week, while a further 314,290 pensioners, or 33 per cent of claimants, receive more than £150 a week. Twenty-nine per cent of claimants receive a state pension higher than the flat rate from protected benefits accrued before the new state pension was introduced.
The lack of awareness regarding the state pension and legacy issues from previous reforms might cause people to claim less than they are entitled to, and it is often the job of advisers to sort this out.
So what common misunderstandings do advisers confront when discussing the state pension with clients, and what techniques do they employ to tackle these?
All the advisers Money Marketing spoke to said clients are surprised by how much the state pension can give them in retirement, and the degree of psychological reassurance that emerges from it.
The realisation that the full state pension is £168.60 per week, which equates to £8,767.20 per year, and that the benefits are index-linked, is not to be dismissed. It also takes the pressure off other assets in a client’s portfolio that might have been initially expected to generate unrealistic levels of income. While the standard way to calculate a client’s entitlement is to use the online state pension forecast tool available, advisers warn it is not foolproof.
Mowatt Financial Planning director William Mowatt says: “The information is not sufficient, especially with regards to pre-2016 National Insurance contributions, where the online system does not give information on whether it would be worth making voluntary contributions for these years.
“In fact, the system will give information on the voluntary contribution required to top up an individual year, but in practice the client will need to call up to understand if this is worth doing or not.
“Can advisers have access to the forecast system? That would allow them to go online and get a forecast, which advisers are in a better position to understand.”
Another way advisers can convey the value of the state pension to clients is by demonstrating how much it would cost to purchase the equivalent benefits on the open market.
The Pensions Experts director Heather Dunne says: “When you look at the cost of buying an annuity to match it, the sum would be absolutely astonishing. For clients who retire early, it is worthwhile for them to make additional voluntary contributions to the state pension as it is cheaper than buying an annuity on the open market. The state pension is index-linked, which is very valuable. And that index-linking is very precious as the inflation-proofing is what makes an annuity expensive.”
Apart from the calculation challenges, Town Close Financial Planning chartered financial planner Mark Williams explains the range of clients and common misconceptions he encounters in discussions about the state pension. He notes: “I would say about 25 per cent of clients will have a fairly good grasp of it. Others might know they are entitled to something but not know how much they can get or when they can access the pension.
“The client might presume they can transfer the state pension, but you have to explain to them it does not work like that.
“There are two extremes on the state pension; those who think the state pension is totally flexible, and others who believe it is worth nothing. Those who do have other assets regard the state pension as trivial.”
Cervello chartered financial planner Sam Whybrow says the most difficult clients to work out the benefits for are surviving spouses who need their state pension topped up from a deceased partner’s NICs.
A person can apply for their husband’s or wife’s NI record to find out if they can access the full state pension if they have not made the full 35 years of contributions.
There are also clients who have worked abroad for some years who have returned to the UK and want to access their state pension at retirement.
Here, advisers are in the hands of the International Pension Centre, the government’s information hub that people have to contact if they live or have lived abroad.
In both contexts, Whybrow says that advisers are somewhat hampered by how far they can plan for the client.
But the difference that the increased state pension can make to these clients is considerable and is worth the effort, Whybrow explains.
He adds: “I helped my mother-in-law who did not have a full state pension, and managed to transfer my late father-in-law’s NIC record to hers to top up her pension.
“The state pension is a massive part of planning and when it kicks in, clients have a backstop, so it is really important.”