The state pension is, of course, an important consideration when managing a client’s retirement income.
Entitlement and the amount depend on various factors and the picture is clouded by the fact that the state pension changed in 2016.
Anyone who reached state pension age before 6 April 2016 falls under the old system with people younger than this qualifying for the new ‘single tier’ state pension. Transitional arrangements though aim to ensure that no one is disadvantaged by the move to the new rules.
There are a number of key differences between the two systems, chiefly:
- The maximum payment for the new state pension is currently set at £164.35 per week as opposed to £125.90 for the old basic state pension. However, the annual increase for both schemes is based on the government’s ‘triple lock’ commitment introduced in April 2011. This guarantees to increase the state pension each year by a minimum of either 2.5 per cent, the rate of inflation, or the rate of average earnings growth.
- It was possible to boost your pension under the old system through the additional state pension (you could also ‘contract out’ of this scheme). This additional payment can be based on payments made to three separate schemes – the state earnings related pension scheme, the second state pension and the state pension top up. These were in place at different times and a client may have contributed to more than one (as well as the graduated retirement benefit scheme which preceded the additional state pension).
- Thirty-five qualifying years of national insurance contributions or credits are now required in order to obtain the full amount (30 qualifying years were previously needed).
- Ten qualifying years are now required for someone to be entitled to any amount (only one year was needed under the old system from 2010/11).
- Someone can no longer claim based on their spouse’s/civil partner’s NI record (except those covered by transitional protection). In most cases, therefore, a person’s entitlement to the new state pension will be based entirely on their own contribution record.
This last point is quite important. Under the old system, where a spouse/civil partner hasn’t enough NICs to qualify for at least 60 per cent of the basic state pension, they may be able to claim a pension based on their spouse’s/civil partner’s NIC record.
The old rules still apply to people who reached state pension age before 5 April 2016, but they can only use their spouse’s/civil partner’s NICs made up to and including 2015/16 to improve their entitlement.
Checking and boosting entitlement
Anyone can check their entitlement through the government’s online service or by requesting a statement. An estimate is given based on the person’s current NIC record and on the assumption that they’ll continue to make NICs up until they reach state pension age.
If anyone has a shortfall in their NI record, meaning they may not qualify for the full state pension, they can consider making voluntary NICs, however, eligibility rules apply.
A person can also increase the amount they will receive through deferring their state pension but this isn’t an option for those on certain benefits or living overseas. This is normally possible even if someone is already claiming their state pension, although this can only be done once.
The increase depends on when the person reaches state pension age. The system is more generous for those who reached this age before 6 April 2016 and there is still the option of taking the deferred pension as a lump sum for these individuals.
There are many reasons why someone may or may not choose to defer their State Pension. Some individuals, for example, will be wary about not claiming an entitlement they have built up across their adult life.
Of course, whether they should defer or not will depend on their personal and financial circumstances. Factors such as taxation, other sources of income and the desire for a higher guaranteed income for life will be key considerations.
Inheriting a State Pension
This is a complicated area as any claim will depend on various factors such as the scheme – basic, new or additional state pension – and whether the pension has been deferred or not. The age of the surviving spouse/civil partner and whether they’ve remarried or formed a new civil partnership will affect a claim too.
A more straightforward pension system
In most cases, the state pension will form an important part of a client’s overall income in retirement.
As I have illustrated here though, there are significant differences between the old and new schemes and so it’s crucial that advisers remain on top of the intricacies of both.
However, the good news is the new state pension is a lot less complicated than the old scheme and so advising on this area should become more straightforward over time.
Paul Squirrell is national pensions sales manager at FundsNetwork