Gap fill 98 State Pensions “Understanding the structure, relevance and application of state schemes to an individual’s pension planning” Tom Ryan Compliance & Training Manager IFG Group Plc

History…….. State Pension started in 1908 5 shillings a week for a single person 7 shillings and 6 pence if married Old Age Pension Act 1908 Means tested (income had to be less than £21 per annum) From age 70 Non contributory

History…….. Beveridge report in 1942 “Social Insurance and Allied Services” He anticipated a fully funded scheme National Insurance Act 1946 Basic State Pension started 1948

History…….. From the outset, the objective was not to provide a high replacement income for most wage-earners but to provide a safety net against old-age deprivation. Beveridge’s proposal was that individuals would be provided with a flat-rate income in old age that would be just sufficient to lift them above an absolute measure of poverty.

History…….. such a scheme made no provision for pensions for those already older individuals who had suffered through the Great Depression and contributed to the war effort. Faced with the significant immediate bill of paying pensions to individuals who had not made contributions, the government opted to introduce a ‘pay-as-you-go’ system rather than a funded one.

Basic State Retirement Benefits - Basic State Pension Additional benefits - SERPS & S2P Graduated NI Contracting out Survivor benefits State pension credit

Basic State Pension Employed, self employed and those credited with NICs Entitled to the basic amount only £102.15 per week Also known as Category A pension

Basic State Pension Full NICs for 30 years (from April 2010) Used to be 49 years for men and 44 years for women If less than 30 years when they arrive at state pension age, then they get a proportion for each year they have qualifying contributions

Basic State Pension Escalation Used to be the retail price index (RPI) In the emergency budget it was announced that rises would be the higher of NAEI and 2.5% From April 2012 - CPI

Basic State Pension Category B pension Dependant reaches state pension age but has insufficient NICs to qualify for a pension in their own right Maximum is 60% of the basic state pension £61.20 per week

Other basic benefits Christmas bonus £10 Extra 25p per week from age 80 Winter fuel payments £200 per household under 80 £300 if over 80 Pensioners with children who they claim child benefit for, get £20.80 for the first and £13.40 for any others

National Insurance Contributions (NICs) Class I Builds up entitlement to basic state pension, SERPS and S2P Employee conts are PRIMARY class I Employer - secondary

National Insurance Contributions (NICs) Paid on earnings between the primary earnings threshold £139 per week and Upper earnings limit of £42,475 Employer pays on ALL earnings above the secondary threshold of £136 per week

National Insurance Contributions (NICs) If an employee is contracted IN 12% on earnings between primary and upper plus 2% on all earnings above the upper limit Employer pays 13.8% on all earnings above secondary threshold

National Insurance Contributions (NICs) LEL is currently £102 per week No effect on NIC paid If someone earns between LEL (£102) and the primary threshold of £139, no NIC paid but they still build up credit to Basic State Pension

Example Weekly earnings £920 Employee pays Employer pays

Class II and Class IV For self employed people Build up entitlement to BSP – nothing else, no SERPS or S2P Class 2 is flat rate £2.50 per week Class 4 based on profits 9% on profits between £7,225 and £42,475 2% on profits above £42,475

Class III Voluntary – normally paid by people who have an inadequate record Must pay within six years of the tax year in which the shortfall occurred And before they reach state pension age Weekly rate is £12.60

NIC Credits Unemployment/Maternity/Sickness Between age 16 and 18 Over 18 and in full time training – BUT University does NOT count Receiving child benefit for a child under 12 Income support – caring for a disabled person

Forecast Service of DWP Qualifying years Estimate of current Value of pensions Estimate of pension at SPA Forecast of how benefits could increase if deferred How to improve by using class III Additional state pension entitlement

Death Benefits Widowed Parents Allowance Taxable weekly benefit and payable if Deceased had a satisfactory NIC record Death caused by their job Survivor is under the SPA at date of death Survivor has at least one qualifying child for whom they are entitled to child benefit or widow is expecting a baby

Death Benefits Current maximum is £100.70 per week Plus a share of any additional state pension built up prior to death This share will be between 50% and 100% depending on the deceased’s date of birth

Death Benefits Satisfactory NIC record = at least one qualifying years NIC For the maximum to be paid, must have paid NICs for 90% of their working life from age 16 to the tax year before death Payable until remarries or child reaches age of 19

Death Benefits Bereavement Allowance Also a taxable benefit Max 52 weeks following death Satisfactory NIC record for deceased Survivor between 45 and SPA Not bringing up children Not entitled to Widowed Parents Allowance

Death Benefits Ceases if Remarries Starts to co-habit Reaches SPA

Death Benefits Bereavement Payment One off tax free payment Currently £2,000 Satisfactory NIC record Survivor not co-habiting with someone else at the time of the death Survivor not connected with any unlawful killing of late spouse Deceased not entitled to BSP and survivor under SPA

Inheriting SERPS/S2P Death before 6th October 2002 Inherits 100% of deceased’s SERPS Death after 6th October 2002 Also inherits 100% - provided that deceased reached SPA BEFORE 6th October 2002. Date of birth on or before 5th October 1937 for men or 5th October 1942 for women

Inheriting SERPS/S2P If death occurred after 6th October 2002 and deceased had not yet reached SPA – amount inherited is determined by the date they would have reached SPA Complex !! See tables.......

Inheriting SERPS/S2P Maximum SERPS/S2P MEN entitlement Man’s date of birth 90% 6 October 1937 to 5 October 1939 80% 6 October 1939 to 5 October 1941 70% 6 October 1941 to 5 October 1943 60% 6 October 1943 to 5 October 1945 50% 6 October 1945 and later Maximum SERPS/S2P WOMEN entitlement Woman’s date of birth 90% 6 October 1942 to 5 October 1944 80% 6 October 1944 to 5 October 1946 70% 6 October 1946 to 5 October 1948 60% 6 October 1948 to 5 July 1950 50% 6 July 1950 and later

S2P Second State Pension Can only inherit a maximum of 50% of S2P Maximum amount of SERP/S2P received is reviewed each year and applied at the date entitlement first arises. This is a combination of their own entitlement and any inherited amounts. Maximum is £159.52 per week

Deferring State Pension Not obliged to take at SPA Can defer to a later date, to get more Income increased at 0.2% per week – equivalent to 10.4% per annum If deferred by at least 12 months, then it is possible to receive the deferred benefit as a lump sum

Deferring State Pension Lump sum is the amount of pension they would have received, plus interest at BOE base + 2% This is taxable at the client’s marginal rate Can only defer ONCE Normally resident in the UK....or

Deferring State Pension Living in .............. Austria, Belgium, Cyprus. Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Hungary, Iceland, Italy, Latvia, Lichtenstein, Lithuania, Luxembourg, Malta, Netherlands, Northern Ireland, Norway, Poland, Portugal, Republic of Ireland, Slovakia, Slovenia, Spain, Sweden or Switzerland.

Deferring State Pension Cannot do if in receipt of Carer’s Allowance Short term incapacity benefit Another type of state pension Severe disablement allowance Unemployment supplement Widow’s pension Widowed Mother’s allowance

State Pensions............ Any Questions so far?

Tax treatment of the Basic State Pension BSP is taxable But always paid gross If income from all sources is below the personal allowance – no tax to pay If total income is over the allowance there will be tax to pay

Tax treatment of the Basic State Pension Can be collected via coding notice if in receipt of other pension income Through PAYE if still working or Via the self assessment return

Overseas Aspects Can be paid to someone living abroad Annual increase is the issue here May/may not get annual increases, it depends where they are living and for how long Generally OK if in EEA or another country that has a reciprocal social security arrangement with the UK

State Pension Age 65 for Men Was 60 for women until April 2010 Gradually being increased to 65 Was due to be complete by 2020 Now..............November 2018 Between November 2018 and April 2020, all SPAs will change to 66

State Pension Age These changes are not law yet........ Pensions Act 2007 originally proposed From 65 to 66 between 2024 and 2026 From 66 to 67 between 2034 and 2036 From 67 to 68 between 2044 and 2046 Watch this space................

Additional state retirement benefits Graduated NI April 1961 – April 1975 SERPS April 1978 – April 2002 S2P from April 2002 But how are these worked out ?

Graduated NI Pension “units” were granted in return for contributions For every £7.50 for a man and £9.00 for a woman of contributions paid, this earned them an extra pension unit of 11.53p per week.

Graduated NI Maximum pension is £10 for a man and £8 for a woman Women reaching SPA after 6 April 2010 will have theirs worked out on the same basis as a man Can be inherited on death of a spouse the rate is 50%

SERPS Social Security Act 1975 Started April 1978 Only employees who paid class I NIC were eligible for this additional benefit Based on “middle band” earnings LEL £102 pw UEL £817 pw Max intended was 25% of middle band of earnings

SERPS But which earnings? At SPA? The best 20 years (effectively therefore using 80ths) Earnings from previous years indexed by NAEI Government of the day soon discovered that this was too expensive

SERPS Social Security Act 1986 Reduced from 25% to 20% Phased in for anyone reaching SPA on or after 6 April 2000 Applies to accruals for 1988 onwards Best 20 years changed to revalued lifetime earnings

SERPS These changes had a massive effect on the pensions costs The Child Support, Pension and Social Security Act 2000 introduced the Second State Pension S2P Came into force April 2002

S2P Aimed at low earners and non earners/carers so that they could accumulate some additional pension in addition to the basic amount Was also to encourage high earners to move into privately funded arrangements

S2P Eligibility Method of calculation will particularly benefit those earning no more than the Low Earnings Threshold (£14,400) Also available to individuals who earn between zero and the low earnings limit (£5,304)...PROVIDING THAT they are....

S2P Looking after and receiving child benefit for a child under 12 Caring for a sick or disabled person for more than 20 hours per week and claiming carer’s credit Registered foster carer Other benefits due to illness/disability Payable from SPA

S2P Calculations Complicated................ Earnings related part and A flat rate scheme too Earnings – if someone earns less than LET, but at or above the LEL, (£14,400 and £5,304) they are treated as though they earn £14,400

S2P Calculations Carers/disabled treated as though they earned LET Accrual rate is 40% over a full working lifetime Any earnings above the LET included up to the upper accrual point (UAP) which is set at £40,040 This rate set in April 2009 and does not increase (replaced UEL)

S2P Calculations Accruals on the extra income above the LET accrue at 10% If someone had earnings of £15,000, the S2P entitlement would be (£14,400 - £5,304) X 40% = £3,638.40 Plus (£15,000 - £14,400) X 10% = £60.00

S2P Calculations Up to April 2010, there was a 20% band that applied between LET and HET. 20% and 10% bands merged in April 2010

S2P Calculations 40% accrual rate will be replaced by a flat rate accrual from 2012/2013 The 10% band will continue until 2030 and by this date the LET is expected to be as large as the UAP. At that point S2P will be left as a flat rate scheme.

Contracting out Withdrawal from the earnings related part of the state scheme, and sets up their own arrangement. Employee makes the decision May be out by virtue of membership of an occupational pension scheme Employer makes decision

Contracting Out Defined Benefit scheme Employer and employee pay reduced NIC Employee 10.4%, plus another 1.6% rebate on earnings between the LET and the primary threshold Employer 10.1%, plus another 3.7% rebate on earnings between the LET and the secondary threshold NIC on earnings above UEL – same as C In

Contracting Out Defined Contribution Occ Scheme NICs are reduced and it is the employers responsibility to pay this NIC rebate into the scheme. Flat rate rebate Age related rebate, paid directly into the scheme at a later date. Paid by HMRC, and is usually between 3% and 7.4% depending on the employee’s age

Contracting Out Appropriate Personal Pension Plan No reduction in amount of NIC paid Age related rebates are paid by NICO directly into the plan 9.4% to 14.8% (40% tier) 2.35% to 3.7% (10% tier) Benefits are known as protected rights Money purchase, no guarantees

Contracting Out Decision Can get complicated ............ Trust Government to pay? Need for tax free cash? Control Disappear in April 2012 Investment Risk Death benefits Flexibility

Pension Credit Introduced in October 2003 Replaced MIG (April 1999) Designed to give a minimum level of income in retirement Scheme has been criticised in the past for reducing incentives to save for retirement

Guarantee Credit Aims to ensure that claimants have a minimum level of income in retirement £137.35 for a single person and £209.70 for a couple

Pension Credit Pension credit designed to overcome past criticism of penalising those who save It is means tested, and consist of two parts, the guarantee credit and the savings credit Pensions, working tax credits, earnings, savings and most Social Security benefits are taken into account

Pension Credit Attendance allowance, disability living allowance, housing benefit and council tax benefits are excluded Savings below £10,000 are ignored Savings above £10,000 are assumed to give a weekly income of £1 for every £500 over the limit

Savings Credit The guarantee Credit is £137.35 Savings credit threshold is £103.15 Difference is £34.20, which at 60% = £20.52 = maximum savings credit Maximum for a couple is £27.09 If income exceeds the guarantee then savings credit entitlement is reduced by 40p for each £1 of income over the limit until the savings credit hits zero

Example Derek is 66 and single, no savings and his income is BSP £102.15 plus a PPP income of £8.90, total £111.05 Guarantee limit £137.35 - £111.05 = £26.30 top-up to his BSP Savings credit = 60% X (£111.05 - £103.15) = £4.74 Total will be £111.05 + £26.30 + £4.74 = £142.09

Same Example But this time he has £15,000 in savings First thing is to work out the “income” He is £5,000 over the limit Income is deemed to be £1 for every £500 over the limit Extra income deemed to be £10

Same Example Income is £111.05 + £10.00 = £121.05 Guarantee is £137.35 - £121.05 = £16.30 Savings is 60% X (£121.05 - £103.15) = £10.74 Total is £121.05 + £16.30 + £10.74 = £148.09 Guarantee has been reduced BUT savings credit has been increased, so no penalty for saving

Advising clients Very important to assess client’s entitlement to state pensions Using a BR19 is very helpful in this process Invariably there is a mismatch between when a client wants to retire and when state benefits start to pay

Advising clients How are you going to manage the mismatch?

Age discrimination New rules came in on 1 October 2006 Default retirement age of 65

Demographics Each year, about 650,000 people turn 65 There are now more people in the UK aged 60 and above than there are under 18 There are over 12 million people of state pension age (currently 60 for women and 65 for men), almost 1 in 5 of the UK’s total population There are more pensioners than there are children under 16 There are 10.3 million people aged 65 or over in the UK There are well over 21 million people aged 50 years and over, over a third of the total UK population

Demographics Over 1.3 million people (1,369,300) are aged 85 or over There are nearly twelve thousand centenarians The number aged 60 or over is projected to rise by over 50 per cent in the next 25 years • The number of people aged 60 or over is expected to pass the 20 million mark by 2031

Demographics UK life expectancy estimates at the age of 65 are 85.4 for women and 82.8 for men. Projections for 2025 for life expectancy at 65 are 88.3 for women and 86.1 for men One in four children born today can expect to live to 100 years old

State Pensions Any questions ? Thank you for listening