Although they will never provide more than a basic standard of living, the starting point in conside...
Although they will never provide more than a basic standard of living, the starting point in considering pension provision for clients has to be the benefits provided by the state. These are the foundations on which a solid financial structure can be built.
However, although they are guaranteed in one sense of the word, state pension benefits are currently in a state of considerable flux. In this short series of features, we will consider what the benefits are, what changes are being made, and how these impact on financial advice.
State pension benefits
State pension benefits are made up of three basic components:
The Basic State Pension (BSP) is available to everyone who has paid sufficient National Insurance contributions.
To qualify for the full amount, currently £67.50 a week, contributions must have been made or credited for at least 90% of the individual's working life (the period between age 16 and State Pension Age).
Since contributions are credited to many people who are not working, those who are unemployed, receiving maternity allowance or taking an approved training course for example, the majority of those who live in the United Kingdom throughout their working life are likely to receive the full BSP.
The main exception is married women who opted to pay the reduced stamp before 12 May 1977. They are not entitled to BSP in their own right, but their husband can receive BSP at the married couple's rate of £107.90 a week.
The State Earnings-Related Pension Scheme (Serps) provides an additional pension for employees, based on their earnings since 6 April 1978.
Some may also be entitled to benefits from the earlier graduated pension scheme. Serps benefit is based on band earnings, for those between the lower and upper earnings limits, which are currently £67 and £535 a week respectively.
The band earnings for each year are revalued to retirement based on increases in average earnings. The maximum Serps pension was up to 25% of total revalued band earnings for those retiring before 6 April 2000.
It will be less for those retiring later, and was intended in the long run to be 20% of band earnings. This proposal has been superseded by the new State Second Pension (S2P), however, which we will consider in detail in a later article.
There is now a Minimum Income Guarantee (MIG) for pensioners. This currently guarantees an income of £78.45 for single people and £121.95 for couples (more for those over 75). The operation and implications of MIG will be considered in the remainder of this article.
As it stands, MIG is basically Income Support at a higher level for older people. Indeed, until the Government's publicity campaign fronted by Dame Thora Hird, it is unlikely that most people were aware that it is any different from normal Income Support. Claims procedures are similar to those for Income Support, and so are rules on allowable savings and entitlement to other benefits.
In its present form, MIG suffers from the major drawback that it acts as a disincentive to saving.
For example, someone who was entitled to a BSP of £67.50 a week, and had additional private provision of £10 a week (which could come from a pension fund of around £8,000 at retirement) would receive an extra £0.95 a week from MIG. If that same person had no pension provision at all, the benefit from MIG would be £10.95 a week. Clearly that person would have been better off spending the money when they had it in the first place rather than saving for retirement.
The rules on savings are also currently flawed. Anyone with savings of £3,000 or more will lose some MIG entitlement. The reduction is £1 per week for every £250 of savings, which is effectively equivalent to an interest rate of about 20% a year. MIG entitlement stops altogether if savings are above £8,000.
The £3,000 and £8,000 are increasing to £6,000 and £12,000 respectively from April 2001. Finally, as with all Income Support, entitlement to MIG brings entitlement to other benefits such as housing allowance. As soon as an individual has income above the MIG limit such allowances stop, which is a further disincentive to save.
These problems with MIG raise serious issues over whether advisers should recommend that a client without existing capital or pension provision should save for retirement at all.
There is little point making sacrifices while working if the amount saved simply result in a reduction to state benefits.
With MIG and BSP at current levels, the issue mainly affects self-employed people. Employees with Serps entitlement will generally find that this takes them over the MIG threshold. However, the Government plans to increase MIG to £100 a week for single people from April 2003, which will bring a lot more people into the net.
In an effort to remove the saving disincentive, the Government has proposed a new initiative, the Pension Credit.
The Pension Credit
The DSS has recently published a consult-
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continued from page 82
tion paper on The Pension Credit (CM 4900, available for downloading from the DSS web site, www.dss.gov.uk).
The basis of the Pension Credit is that MIG entitlement increases by 60p for every £1 of income apart from BSP. Put another way, individuals only lose 40p from every £1 of personal income, compared with the full £1 at present. There is a point where actual income passes the MIG entitlement, in 2003-2004 this is likely to be about £135 a week for single people and £200 for couples. The effect is illustrated in the chart on page 82.
As an example, assume an individual has a BSP of £77 a week (the expected level for tax year 2003/04) and an additional pension (from Serps and/or private provision) of £40 a week.
As things stand, their income of £117 a week would be above the MIG level and so they would get no top-up. Under the new proposal, their MIG entitlement would be i
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