1. 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

2. 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

3. 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

4. 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.

5. 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.

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

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

8. 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

9. 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 CPI

10. 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

11. 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

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

13. 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

14. 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

15. 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

16. Example Weekly earnings £920 Employee pays Employer pays

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

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

26. 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

27. 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 Date of birth on or before 5th October 1937 for men or 5th October 1942 for women

28. 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

29. 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

30. 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 £ per week

31. 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

32. 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

33. 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.

34. 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

35. State Pensions
Any Questions so far?

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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 ?

42. 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.

43. 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%

44. 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

45. 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

46. 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

47. 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

48. 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

49. 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....

50. 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

51. 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

52. 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)

53. 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

54. 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

55. 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.

56. 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

57. 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

58. 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

59. 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

60. 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

61. 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

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

63. 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

64. 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

65. 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

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

67. 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

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

69. 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

70. Advising clients
How are you going to manage the mismatch?

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

72. 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

73. 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

74. 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

75. State Pensions
Any questions ?
Thank you for listening