THOUSANDS of pensioners have been issued a warning over a little-known rule which could see their payments slashed.
Widowers receiving the old state pension are being stung with deductions after inheriting their partner’s pensions.
The current full new state pension is worth £221.20 a week and was introduced on April 6, 2016.
You qualify if you are a man born on or after April 6, 1951, or a woman born on or after April 6, 1953.
But anyone born before these dates receives the basic state pension which is worth up to £169.50 a week.
This basic pension is split into two parts – the basic state pension and additional state pension.
Under the old pension system, people were able to inherit some of their partner or spouse’s additional state pension if they died.
Partners could only pass over the additional state pension if they were on a company pension scheme and “contracted out”.
This means they transferred some of their National Insurance contributions from their basic state pension to a private pension.
The idea behind this was that the alternative pension plan would yield a larger pot later on in life.
But contracting out also meant workers’ old state pension had deductions taken from it because it was missing the NI contributions.
Any widows who took on the additional state pension from their partners when they died also took on the deductions.
It means for anyone who has reached state pension age but is already receiving the maximum amount each week, the deductions actually make them worse off.
Alice Guy, head of pensions and savings at Interactive Investor, said: “This weird quirk affects thousands of widows each year who have built up their own state pension entitlement, only to see it reduced when their husband dies.
She added: “The confusing rules meant that some widows could end up with less money after their husband died.
“The new state pension, for those who retire after April 2016, doesn’t include these complicated rules as each person builds up their own state pension entitlement which can’t be passed on to a spouse.”
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won’t be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension – This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you’ll be paid a set amount each year upon retiring. It’s often referred to as a gold-plated pension or a defined benefit (DB) pension. But they’re not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you’ll need 35 years of National Insurance contributions to get this. You also need at least ten years’ worth to qualify for anything at all.
- Basic state pension – If you reach the state pension age on or before April 2016, you’ll get the basic state pension. The full amount is £156.20 per week and you’ll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what’s known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
It is understood over 5,000 widows were impacted by this state pension issue last year, according to an FOI submitted by The Times.
What is the basic and additional state pension and how am I affected?
You may be affected if you are on the old basic state pension and receive your partner’s pension after they die and if they contracted out during their lifetime.
Under old pension rules, the state pension is split into two parts – the basic state pension and additional state pension.
You can receive up to £169.50 a week basic state pension and £204.68 a week additional state pension.
You build up entitlement base on how many years you work and make National Insurance Contributions NICs.
How to make sure your pension is left to your loved ones
HELEN Morrissey, senior pension and retirement analyst at Hargreaves Lansdown, reveals how to make sure your pension goes to the right place when you die.
Keep expression of wish forms up to date for all the pensions you accumulate over your working life. This is especially the case if you cohabit with someone rather than get married.
Contrary to popular belief there is no such thing as common-law marriage and people can live together for many years and not have the same rights as a married couple.
This means cohabiting couples may not get the benefits they were expecting should their partner die – keeping these details up to date is crucial to avoid financial hardship.
If you are in a relationship and have chosen an annuity to take your retirement income then ask yourself what your partner would be left with if you were to die first.
If you have the lion’s share of the pension’s savings, you can consider taking a joint, rather than single life annuity.
While the income on a single life annuity is higher your spouse will be left with nothing when you die.
The number of years you need to work to get the maximum can depend on when you work and if you are a man or woman.
If you’re a man you usually need:
- 30 qualifying years if you were born between 1945 and 1951
- 44 qualifying years if you were born before 1945
If you’re a woman you usually need:
- 30 qualifying years if you were born between 1950 and 1953
- 39 qualifying years if were born before 1950
This will qualify you for the maximum basic state pension, currently worth up to £169.50 a week. If you have less years, the amount you get will be lower.
On top of the basic state pension you will get an amount on top known as the additional state pension – unless you opted out during your working life.
This means you paid reduced NICs while working, and did not contribute to any additional state pension.
Those that did opt out were promised a guaranteed minimum pension at retirement that was the equivalent of what they would have got under the state pension rules.
This amount, GMP for short, was paid instead by a workplace pension.
To check if you or a partner were contracted out, you can take a look at old payslips, or speak to your pension provider.
Partners can inherit between 50% and 100% of the additional state pension of their spouse if they pass away.
The amount will be in addition to their own state pension payments.
If they already get additional state pension payments themselves, they will not get more than the maximum additional state pension amount, which is currently £218.39 a week.
Entitlement can also depend on the ages of both partners, when they reached state pension age, and when the person passed away.
But those who inherit a workplace pension with a GMP can have that amount deducted from their own additional state pension entitlement.
This could even be the case if the surviving partner who inherits the GMP is entitled to their own pension under the new pension rules that came in from April 2016.
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