While there is a real need for more private pension provision for women, the importance of state benefits should not be overlooked
In my article last week, I argued that there is a real need for more private pension provision for women. But that does not mean we should overlook the value of state benefits and the way they affect advice because of the interaction with private provision. Granted, the basic old age pension, at £72.50 a week, may not be much to get excited about, but second-tier state benefits are valuable and should not be ignored. This is of particular importance for women, precisely because they are more likely to have to rely on state benefits in retirement.
Some state benefits are of particular importance to women because the legislation actually affects them directly. For example, it is old news that the state pension age is being raised for women. Women born before 1950 keep their state pension age of 60, while those born after March 1955 will have a state pension age equal to men of 65. For those in between, a sliding scale operates. For many women this will coincide with an increase in their scheme normal retirement date, as many schemes increased female NRD to 65 as part of their equalisation programme.
When these changes were announced, there was a lot of advice activity looking at what women in this situation should do if they still wanted to retire at their original NRD and needed increased private pension provision to bridge the gap until their full state pension is due. At the time, AVCs or FSAVCs were the obvious solution. Now that the defined contribution regime is with us, should women making voluntary contributions for this purpose consider taking advantage of the partial concurrency rules (where they are eligible) and use a personal pension or stakeholder instead? Have they checked their contribution levels are still on target?
As another example, consider the treatment of inherited SERPS benefits. This was clearly a classic example of how not to communicate a change and the result of the outcry was that the change was delayed.
But it is only a delay and inherited SERPS benefits will reduce in future. The timetable for change is as follows:
• For deaths before 6 October 2002, the surviving widow may inherit up to 100% of her husband's SERPS benefit
• For deaths on or after 6 October 2002, she may still inherit up to 100% provided her husband reached state pension age before 6 October 2002
• For deaths on or after 6 October 2002, where her husband had not reached state pension age by that date, her maximum entitlement to inherited SERPS depends on the date on which he would have reached state pension age. This means another sliding scale with the maximum inherited SERPS figure reducing according to the date on which her spouse reached state pension age. The figure is 100% if the state pension age is on or before 5 October 2002, reducing to 50% if state pension age would be reached on or after 6 October 2010.
If all that sounds complicated, that is because it is very complicated. But it is important that advisers are aware of the position on inherited SERPS benefit so they can explain to clients exactly what the situation is and, if necessary, suggest the best way to improve the benefits that the widow will have to survive on once the husband has died. As an aside, the maximum inherited benefits under the new State Second Pension will be 50%.
Of course, the main change in state benefits that will be with us very soon is the replacement of SERPS by the State Second Pension (S2P). Aside from the changes to benefits levels, there are some changes in the eligibility criteria that are particularly relevant for women.
First, State Second Pension benefits will be granted to those who are at home with children under five, and this predominantly means women. Second, State Second Pension will also be granted to those who are in receipt of a carer's allowance ' and 60% of carers in the UK are women.
Benefits under S2P are, of course, calculated in exactly the same way for men and women. It will provide better benefits than SERPS with the improvements in benefits concentrated at the lower end of the earnings spectrum. This is therefore particularly relevant to women since they tend to earn less than men.
These changes to second-tier state benefits will clearly need to be taken into account when giving advice to women clients or to husband and wife as part of a joint pension planning exercise. In addition, the interface between state and private sector benefits has also changed. Not only will State Second Pension offer better benefits than SERPS but the icing on the cake is the ability to pay up to £3,600 a year into a stakeholder or personal pension and so provide private pension benefits as well.
This also introduces a new twist to the old employ your wife scenario. Traditionally, this involved the husband employing his wife, paying her a salary just under the LEL and making contributions to an EPP as her employer. The same principles still apply but the details have now changed. Now it makes sense for the husband to pay his wife a salary just in excess of the LEL and so enable her to qualify for benefits from S2P. And remember, that means a S2P benefit of double the amount of the corresponding SERPS benefits for someone earning £10,000 a year.
As her employer, he can then contribute to a stakeholder or personal pension up to £3,600 a year or maximum fund an EPP on her behalf. It may even be possible to do both. If the concurrency criteria are satisfied, it could be possible to contribute to an EPP and contribute to a stakeholder or personal pension as well.
However, remember that the concurrency criteria include not only the earnings limit of £30,000 but also the requirement that the member cannot be a controlling director. Remember that she can pay into her own stakeholder or personal pension as well.
But the interface between state and private sector benefits has another aspect to it that is of particular importance to women. This is the area of means-tested benefits designed to top up relatively modest pensions income. In retirement, women are more likely than men to rely on means-tested benefits. In addition, since on average they earn less than men and tend to have smaller private pensions (where they have private pensions at all) the issues raised by the existing minimum income guarantee and the soon-to-be introduced pension credit will have a particular impact for women.
The minimum income guarantee is designed as a safety net in retirement. By 2003 it will be at least £100 per week for a single person and £154 per week for a couple. But the problem with the minimum income guarantee is that it is clawed back against other income on a pound for pound basis. In a world where the plan is supposed to be to encourage people to save for their own retirement, this makes no sense at all.
And so the plan is to introduce pension credit from 2003, which aims to provide an incentive for those on moderate earnings by reassuring them that it pays to save. As it is currently proposed, this would allow moderate savers to keep up to 60p in the pound of their pension income in retirement, rather than losing it all as currently happens with the minimum income guarantee.
While the aim is laudable, it must surely be doubtful whether those who have had moderate earnings all their life and paid (at most) basic rate income tax will be encouraged to save by a proposal that plans to claw back the equivalent of higher rate tax on their pension in retirement. And since pension credit will have to interact with other state benefits like housing and council tax benefit, there is the potential for the mechanics to become very complex indeed.
We can expect to see a draft bill on pension credit very soon. If it is to do its job of encouraging savings among moderate earners (men and women alike) it must be simple and offer sufficient incentive. Watch this space.
To return to our main theme of pensions for women, ideally we need to see more reliance on private sector benefits. But we should not forget that state benefits are important. They are important not only because they continue to form what the government calls the cornerstone of retirement income, but also because of the interface between state and private sector.
Keeping up to speed with the impact of changes on both sides of the fence and how those different changes interact is necessary if we are to find the right solutions for pension planning
Advisers need to be aware of the position concerning inherited Serps benefits.
S2P will be granted to those in receipt of a carer's allowance ' 60% of whom are women.
In retirement, women are more likely to rely on means-tested benefits than men.
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