Our view is that professional advisers are likely to face increasing curiosity from clients about the new State Pension and the role it will play in financial planning for retirement. It will fall to advisers to explain how it works and how to make the most of it.
The government has promised no-one will be worse off under the new rules. For each pensioner who reaches state pension age on or after April 6th this year, a ‘foundation’ amount will be calculated based on entitlement as at April 2016 taking account of any contracted out periods in a person’s national insurance record.
Given the complexity of calculating a foundation amount, the practical way for most clients to get a realistic understanding of their entitlement is by obtaining a BR19 pension statement from the Department of Work and Pensions, which should provide a good starting point for discussions.
It’s ironic that an attempt to deliver a simpler and fairer state pension is laden with so much complex detail but, as with many technical changes to rules, it reinforces the value of professional advice for helping clients unravel the details.
The complexity doesn’t stop there. To address discrepancies under the new rules, certain retirees can currently increase their basic state pension entitlement (currently £119.30 per week) by making an additional lump sum payment.
Those who reached state pension age (63 for women and 65 for men) before the April rule change have until April 2017 to decide whether to make a lump sum payment in the form of voluntary class 3A National Insurance contributions in order to buy a higher state pension of up to £25 a week.
The older people are, the less they need to pay for each £1 of extra income. A 63-year-old woman would have to pay £934 for £1 of extra weekly state pension, or £23,350 for the maximum £25. At 65, the age from which both men and women can buy extra income, the price has fallen to £890 for £1 a week extra, equal to £22,250 for the maximum £25 a week.
The extra income is payable for life and increases with the Consumer Price Index for those living in the UK, Europe and other countries the UK has a reciprocal agreement with. In most cases between 50 and 100 per cent of the extra income can be inherited by a surviving spouse or civil partner.
State pension top up is not right for everyone and depends on an individual’s contribution record and circumstances. In some cases it will be better to increase entitlement to state pension by filling in gaps in their National Insurance record, such as where someone has less than a full 30-year record.
