Exam study: State Pension
12 April 2021
The Brand Financial Training team focus key points to learn in respect of the State pension – old and new
Even though basic State Pension has been replaced with the new State Pension, it is still paid to those that retired before April 2016 so will often rear its head in the CII exams, particularly in R04 (pensions and retirement planning) but also in R06 and in AF5 where the answers are written rather than simply chosen from four options in a multiple-choice question.
In this article we look at the details for the pre-2016 State Pension (and also a quick comparative look at the State Pension paid post-2016).
As mentioned, basic State Pension is paid to those who reached State Pension age before 6 April 2016.
Someone qualified for a full basic State Pension if they had at least 30 qualifying years; if someone had fewer than this they receive a proportion of the full amount.
An individual could also be receiving Additional State Pension for example State Earnings Related Pension Scheme (SERPS) or State Second Pension(S2P), if they had not contracted-out.
The full single person’s basic State Pension is £134.25 per week or £6,981 per year.
State Pension can be deferred and for those reaching SPA before April 2016 deferral could be in return for an increased income or a lump sum. Deferral had to be for at least five weeks and in return the pension amount increased by 1% for every five weeks deferred which worked out as an increase of 10.4% per year. If someone deferred for 12 months a lump sum could be chosen instead with interest added at 2% above the bank’s base rate.
Even if someone is receiving basic State Pension now they can stop taking it and they will still be subject to the pre-2016 deferral rules.
If someone died during deferral under the old rules then their spouse or civil partner could inherit subject to various conditions set by the DWP.
The new State Pension
The new State Pension applies to those reaching their State Pension age on or after 6 April 2016.
To qualify for any new State Pension 10 qualifying years is needed (either of contributions or credits) and to get the maximum amount at least 35 qualifying years are necessary.
The full rate of new State Pension is £175.20 per week or £9,110.40 per year.
Anyone who hadn’t reached SPA before 6 April 2016 had a starting amount calculated which was the higher of their pre-April 2016 entitlement and their new State Pension entitlement. If this figure was lower than the full amount of new State Pension in 2016/17 (£155.65) it can be increased through buying more qualifying years. Where it is higher the difference is the ‘protected payment’ and this is paid on top of the new State Pension.
Anyone reaching SPA since 2016 has only been able to defer for an increased income – the lump sum option was withdrawn. The deferral period was also increased to at least nine weeks with the rate of increase similarly reduced (1% for every 9 weeks); this works out as an increase of just under 5.8% for each full year of deferral.
Under the post-2016 rules it is not possible for a survivor to inherit deferred State Pension although the estate may claim up to three months’ arrears of their State Pension.
Here is a question on State Pension from an old R06 exam:
Kaitlyn is 68 and deferred her State pension in 2014.
Identify the benefits that Kaitlyn will accrue from her State Pension deferral. (4)
Seth is aged 64 and will retire when he reaches 65.
Identify the factors Seth should consider before deciding whether to defer his State Pension (4)
The model answers were:
With this exam there were clear signposts in the case study to prompt candidates to study aspects of State Pension deferral and for eight marks this would have been well worth doing.
This article was first published in the April 2021 issue of Professional Paraplanner.
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