State Pensions and related benefits – what you need to know
In this webinar, Senior Intermediary Development and Technical Managers Craig Muir, Justin Corliss, and Gregor Sked, investigate the pension concerns our technical team are regularly asked about, as well as the questions raised during our customer research.
We’ll include planning points to demonstrate practical measures you can use to alleviate some of the problems you and your clients may encounter.
There's a great deal of confusion about the new State Pension – with customers wondering when they’ll receive it, how much they’ll get and what COPE is.
We’ll answer all these questions and many more during this session.
We’ll also explore the changes to the accrual of the State Pension, including State Pension forecasting, ‘topping-up’ missing years, and increasing State Pension via deferral.
For many the new State Pension will provide a considerable proportion of their income in retirement, so we’ll consider the value of the State Pension and how it can be used in conjunction with the PLSA’s Retirement Living Standards.
- Understand frequently asked questions about State Pensions.
- Explain the importance of the State Pension to your clients.
- Be able to explain how protection advice can support clients in maintaining their later life objectives.
- Changes to State Pensions.
- Frequently asked questions about State Pensions.
- How State Pensions can be used in conjunction with PLSA’s Retirement Living Standards.
- Identifying protections opportunities to support clients.
- View and download the webinar slides (PDF)
Hi everyone and thank you very much for your time. My name is Justin Corliss and I'm joined today by my colleagues Craig Muir and Gregor Sked.
We are all part of the intermediary development and technical team at Royal London and in today's webinar, we're going to look at the state pension, as this is an area that our technical team and ourselves get asked about regularly. And I can understand why there are so many questions about this as there seems to be, you know, a degree of confusion around how much we’ll get paid, how the changes from basic to the new state pension work and when the state pension age is increasing. And of course it doesn't help when we get state pension reviews which make recommendations, the government agrees with those recommendations, but they don't get written into legislation. So hopefully we can sort out the facts from the fiction in this section.
Now, just a few housekeeping rules before we get started. If you're watching this as a live webinar, then you'll be able to raise questions using the chat facility down the right-hand side of your screen and we'll get back to you with the answer as soon as we possibly can. It won't be during the webinar, however. Alternatively, you can raise your question with your usual Royal London Business Contact if you'd prefer. Now if you're watching a recording of this, then the chat facility won't be available to you, so the only option for raising the question will be through that usual Royal London contact. Now with regards your CPD certificate, you'll need to answer some questions after the webinar and then that CPD certificate will automatically generate for you. OK, that's the housekeeping over.
So, this session should be appropriate for all advisers listening really, even those who don't have pension clients, as almost all of us will receive the state pension. And when we do get to the protection section, just bear in mind if you're not a protection adviser, consumer duty means you need to consider the protection needs of your clients to prevent foreseeable harm, even if that just means referring them on to a protection specialist. Now, throughout this presentation, we're going to show you the questions we've been asked most often regarding the state pension. And of course, we're going to provide you with some answers as well.
We'll also look at the impact of protection on achieving later life plans, but of course for all of this to be CPD-able we need to have some learning objectives. So, by the end of this session, you'll be able to understand the frequently asked questions about the state pension, explain the importance of the state pension to your clients and explain how protection advice can support clients in maintaining their later life objectives.
OK. Now throughout this presentation we'll have slides like this one. Now these questions all came from our state pension webinar for consumers, which was attended by both Royal London and Non-Royal London customers. I don't think the questions will be a particular surprise to you advisers, as you're probably getting very similar questions from your clients. Now, we actually had over 600 questions asked in advance of the session and then another few hundred asked on the day. I'm pretty sure it's the largest number of questions we've ever had for a webinar. So, clearly there is a huge amount of confusion around the state pension.
Now the questions fit into quite similar themes, so we thought it would be useful to cover those off today. Now there is a real lack of understanding about how the state pension works and what people are entitled to. So firstly, let's look at the basics.
Right, we've got a variety of numbers on the screen here, don't we? And I'm sure you advisers know the majority of them. However, we know, don't we, that customers don't know all these numbers. So first up in the 23/24 tax year, the full new state pension is £203.85 per week or £10,636.60 per annum, now just as a as a bit of a heads up on how we arrive at that £10,636.60 per annum, we take £203.85 per week, we divide it by 7 and then we multiply it by 365.25 just to account for that leap year.
Now the basic state pension is currently £156.20 a week or £8150.29 per annum.
So the new state pension is approximately £2500 per annum higher. Now obviously, if you have a couple who are both receiving the full new state pension then that's £21,273.20 per annum which to my mind will go a long way to cover off the basic income needs of many retirees. We'll look at income needs later in the session as many individuals are uncertain how much income they will need when they stop work, and the state pension is an integral part of meeting the retirement income needs for most people.
So to answer the question from the previous slide, how many years do I need to pay full National Insurance contributions for to get the full due state pension? Well, the answer is you need to pay 35 years of National Insurance contributions or receive NI credits to get the full new state pension. It was 30 years, if you recall, under the basic system and you had to have paid at least 10 years of National Insurance contributions or received the credits to get any benefit at all under the new state pension compared to just one year as it was under the old basic system.
Now just to make clear, once somebody has reached the 10 years, they don't start from one again but have 10/35th of whatever the new state pension happens to be at that point. So, what happened if you'd accrued benefits under the old system and then started to accrue benefits under the new state pension system, did you lose those old benefits?
Well, no, of course not. What happens is, as at the reference date of the 6th of April 2016, that's the date that the new state pension was introduced, the DWP, the Department of Work and Pensions, do a test to work out what they call your current entitlement. And you can see that over on the left-hand side and it's made-up of all those things you can see there. The basic state pension, graduated pension, SERPS, S2P I probably really should have included NI credits too. And we'll talk about the importance of those shortly.
But, you know, at the same time they do a second test and that assumes that the new state pension had been in existence throughout your working life and the higher of these two figures becomes your starting or your foundation amount. And from here, every year of National Insurance contributions you pay, you accrue 1/35th of the new state pension on top, up to the maximum.
Now of course you can get more than the new state pension if you're prepared to delay, and for every one year that you delay, you get an increase in your state pension, when it does come into payment, of 5.8%. It works out to be about 1% for every nine weeks that you delay.
Now, there were a few reasons that the new state pension was introduced. OK, the first was simplicity for the individual. You see, under the current entitlement made-up lots of different parts, pretty confusing to work out where you stand. Under the new system, much easier. For every one year’s National Insurance contributions you pay, you accrue 1/35th of the new state pension. And of course, no contracting out going forward to muddy the waters.
So, if somebody pays 20 years, they'll receive 20/35ths. If they pay 45 years now, unfortunately, they still only received 35/35ths in that case, even if you do pay in for 45 years. Now, another reason was so that people built up an entitlement in their own right. If you recall, under the old system, you could sometimes claim on spouses National Insurance contribution history, that's gone. Now everyone accrues in their own right. So, if you do have any clients who are off work for whatever reason, maybe stay at home parents as a good example. Then please make sure that they're applying for any credits to which they're entitled. And the final reason that I'll touch on just now is simplicity, but not necessarily for the individual, but rather for the DWP. Apparently, they'll save millions per annum via this simplified administration.
Right, let's go back and consider whether it's worth delaying taking the new state pension, as that was another question that we've been asked quite regularly. Of course, we need to consider that more and more people are working in later life, so this can impact the tax situation when the state pension's paid. Now, prior to 2016, it was more beneficial to delay taking that state pension as you received a higher uplift and you could take any missed income as a taxable lump sum. But that's no longer the case. You can't take that taxable lump sum anymore. Therefore, you know, should a client defer taking their state pension, and the answer is, well, actually it depends.
Now, as I mentioned earlier, you can get more than the new state pension if you choose to delay and for every one year you delay you get an increase in the new state pension of 5.8%. And of course you get a compounding effect of that increase due to deferment when the new state pension is increased each year in payment, which of course is currently in line with the triple lock.
Now, one consideration is of course, if you delay taking the state pension, you're missing income that year. OK, so although your client will get an extra 5.8% when it does come into payment, when will they catch up with that missed income? You need to take into consideration the rate of tax that the client is going to be paying. So, for example, if your client is a higher rate taxpayer than their state pension will attract higher rate tax.
But of course what we might try to achieve is if they are a higher rate taxpayer initially, perhaps when they're still working but eligible to take the state pension but don't then delaying their state pension until there are basic rate taxpayer. So that all of their income will be taxed at that basic rate. Now, what we're showing here is the difference in the break even point for someone who's a higher rate taxpayer when they're first eligible to receive the state pension and then becomes a basic rate tax payer when they take their state pension. So for example if someone's a higher rate taxpayer at state pension age and delays taking their state pension for a year when they'll be a basic rate taxpayer, then it will be age 77 that it will take to make up that missed income. However, if they are either a basic or higher rate taxpayer both at state pension entitlement and after the delay of one year, then the break even age would be 80. OK now I will just caveat something there we are assuming with these people that their maximum income isn't above £100,000 so we’re not factoring in the personal allowance tax trap there.
Now, there are a couple of ifs and buts with all of this, you know, what if somebody just needs higher income to make ends meet and they're happy to work on an extra year to achieve this? What if they were going to pay higher or additional rate tax on the pension, which would reduce it by almost half? So, you know, there isn't a universal right answer and it'll come down to people's circumstances. But don't forget the option of paying this income into a personal pension which will receive tax relief or if this isn't possible, maybe due to annual allowance issues, or perhaps if the person is just has considerable wealth they may prefer to pay this into a child or grandchild's pensions, which means they'll get the tax relief and all the benefits that come along with that. And Gregor will explain how this income could be used for protection benefits later on in this session as well.
OK, this isn't specifically the question that we were being asked, but essentially people wanted to know if the state pension will carry on increasing, especially those who are close to retirement. So, it's worth thinking about the triple lock and whether it's still working.
So, is the triple lock working well? The state pension as we know increases by the greater of 2.5% CPI or earnings and that's what we refer to as the triple lock. Well, except for the increase with effect from April 2022 of course when instead we had a double lock in force where the state pension increased by 3.1%, which was CPI from September 2021. Hence the wee asterisk that we've got there, the government decided to remove the triple lock for that year as the earnings had been running at 8% and they felt that was a just a temporary blip post COVID, the triple lock was reinstated in 2023, though, and the state pension increased in April 2023 by 10.1% based on CPI from September 2022.
Now, this graph shows how the new state pension has increased since its launch in April 2016, compared to if it had just increased by 2.5% per annum, CPI per annum or earnings per annum. And you can see clearly that the triple lock has worked really well. If the new state pension had increased by just 2.5% per annum, the state pension would only be £9654 at the moment, 9.25% less. If it had increased by CPI, it would now be £10,038 per annum, 5.6% less, and if it increased by earnings each year, it would be £10,665, which is just £27 higher than its current level. Of course, the reason that earnings is higher is, as I've just mentioned a minute ago, earnings were removed as an option for the 22/23 increase and would have been used otherwise.
But what about the 2024-2025 tax year, will the triple lock stay in force next year? Well, the office of National Statistics produced the average weekly pay increase in September, which is the figure normally used to reflect earnings in the triple lock. And that was reported as 8.5%. Now, this is higher, clearly than 2.5% or CPI, which was running at 6.8%. But the government are thinking about redefining the average pay as currently it includes bonuses. Now as NHS and civil servants received extra bonus in June to help settle pay disputes, this has inflated this year's average weekly pay increase, so if they remove that percentage it would still be a pretty healthy 7.8%. Now, no decisions have been taken yet. But if Mel Stride, the work and pension secretary goes ahead with this move, it would mean the new state pension would be set next April at a weekly maximum of £219.80, £11,468.85. Rather than £221.20 or £11,541.90.
Now, just remember the state pension triple lock was always intended as a means to increase the real terms of basic retirement income, not a permanent solution. So perhaps it's time for policymakers to set a plan for what level of state pension is adequate and affordable, with details of what will replace the triple lock when it's achieved that objective. It certainly would be helpful to clients who are trying to work out their retirement income.
Right. The next question is one which we’re asked a lot. How old will I be when I get the state pension and can it change again? Now, obviously these are pretty important questions. When you're advising clients as you know, the state pension will make up a large proportion of a lot of people's retirement income. Now, we at Royal London recently carried out state pension research with 4000 of our customers and one of the questions we asked was; when do you expect to start receiving your state pension?
And as you can see on the screen a very similar percentage thought that it was 67 or had no idea, it was 21.7% and 21.3% as you can see there. 27.3% are going to be pretty disappointed as they thought it was 65 or lower, including 5% who thought they'd get it at 60 and 2.1% of optimists who thought they'd get it before age 60. But there were also a considerable number of pessimists who swung the other way and thought they'd receive it later than they should.
So let's clear this matter up and explain what the state pension age is and when it's currently planned to change, as clearly there's an awful lot of people who don't know when they're due to get their state pension.
Now, the state pension age for both men and women is currently 66 and increases to 67 from 2028, it actually phases in that increase from 2026. And then it's due to increase to 68 from 2046, again phasing in from 2044. Now you might be sitting there thinking to yourself, hang on, Justin, that's wrong. I read that it was increasing to 68 between 2037 and 2039. And you're correct, you probably did read that.
And this doesn't help with the confusion around the state pension, does it? So, what happened was John Cridland produced a report for the government suggesting we bring forward the increase in state pension age to 2039. Now the government agreed, but then it's never been written into legislation and therefore currently the state pension age will increase to 68 from 2046. And the answer to the other question, could it change again? Well, the short answer is yes, it could.
In the government's latest quinquennial review, just rolls off the tongue that doesn't it. That quinquennial review of the of the state pension they assume that the state pension age would increase to 68 from 2039 and then to 69 in 2073. However, you know, these were just assumptions. The one thing that we can be absolutely sure about is that we have to be given at least 10 years notice of any intention to increase the state pension age.
OK, now I'm going to hand over to Craig Muir to take you through the next part of the presentation.
Thank you, Justin. So hopefully we all agree the state pension is likely to represent a significant proportion of many people's retirement income. Therefore, it's really important that people are fully aware of how much state pension they're in line for because not everyone will be eligible for the full new state pension. Fortunately, it's not too difficult to access this information. There are actually a few ways you can do it. So first, looking at the image on the left, you could complete this form. It's called the BR19 form.
And you can get that on the gov.uk website or by calling the future pension centre, you can see the telephone number on the screen there, it’s 0800 7310175 and then you return it to the address at the end. Now if you prefer, you can get your state pension forecast online. However, you'll need to have a government gateway account to be able to do this. There are some people who already have a government gateway account and for example, those who have had to submit their tax returns because they're subject to the high-income child benefit tax charge.
Now, if you don't already have one, but you want to establish one, I have an image off the gov.uk page that enables you to do this. Do be mindful though that completing the set-up page won't give you instant access as you'll need to wait until you receive your login details.
Once you do receive your state pension forecast, it's going to contain information you can see here Now this one, it comes from the government gateway account and it tells you the date you become eligible for the state pension, the amount you'll receive, and that's based on your National Insurance contributions to date and your state pension forecast. And that assumes you continue to pay in National Insurance contributions or indeed receive National Insurance credits. But just while we're talking about the state pension age, you should point out you have to claim the state pension.
It doesn't just automatically begin when you hit state pension age.
Now, over on the right-hand side at the bottom it says like most people, you were contracted out the state pension and this causes people a lot of confusion. So we'll look at that in a bit more detail in a minute's time.
Now, I want to talk to you about the interaction between National Insurance credits and child benefit. Due to the high-income child benefit tax trap, many people opt out of applying for child benefits, and that can mean they're missing out on National Insurance credits. Now, when it comes to child benefit, once the highest earner in the couple, or in fact the sole earner for a single parent family. If they earn over £50,000 per annum, that individual incurs a tax charge of 1% of the benefit amount for every £100 that adjusted net income is over £50,000. Therefore, once you have an adjusted net income of £60,000, the tax charge will be equal to the value of the child benefit, and it's effectively wiping it out. Now due to this, some couples, particularly those with the highest earner, earns well over £60,000. I've chosen not to receive the child benefit anymore, so they avoid this tax charge.
So, what I'm showing you here is the child benefit application form, and you can see at question 62 it asks if you want to be paid child benefit. Now this is really important if one parent is going to be a stay at home parent, that person needs to complete the child benefit claim form to trigger entitlement to the 12 years of National Insurance credits which is going to be absolutely crucial for people for their state pension. That doesn't mean you need to actually be paid the benefit, in fact as you can see at question 62. It enables your client to say they don't want to be paid it, but they do need to complete the form to get the National Insurance credits.
When Royal London ran one of our consumer webinars on state pensions, this was one of the most frequently asked questions and I'm sure it's something you're asked a lot too. Why don't I get paid the full state pension? I've paid National Insurance contributions for 35 years.
Now, people read about the amount of the state pension and they see that as the minimum amount and we all know that's not the case. The answer to this question is normally because you were contracted out and to properly understand this, we need to go back to the state pension system that existed before the new state pension was introduced in 2016.
Now as a quick reminder, between 1978 and 2016, people state pension entitlement was made-up of the basic state pension and an earnings-related element initially called the state earnings related pension Scheme or Certs. And then there was a later version called the state Second Pension or S2P for short.
Collectively, these are referred to as the additional state pension. However, it was possible to contract out of the additional state pension, which meant that the individual and their employer, if they were in a workplace pension scheme, they paid lower National Insurance contributions in return for not receiving this additional state pension from the government.
Now, if someone contracted out through a defined benefit scheme, they were promised a certain amount of pension in place of the additional pension they were giving up. If someone contracted out through a defined contribution scheme, they and their employer paid the same National Insurance, but some of it was rebated into an appropriate personal pension or indeed an appropriate stakeholder pension contracted out through a DC scheme. It was only available from 1988 to 2012.
Anyway, when the new state pension came about in 2016, it was no longer possible to accrue further additional state pension benefits as all subsequent state pension accrual fell under the new state pension banner. But the government needed to find a way to account for past contracted out. After all, those people had previously been contracted out, they'd paid lower National Insurance contributions and received additional benefits either through the workplace pension or rebates to an appropriate personal pension. So, you know, it wouldn't have been fair if they got the same new state pension as those who hadn't been contracted out.
A couple of other reasons why someone may not receive the full new state pension apart from not having 35 qualifying years, is if someone was self-employed as they were never part of S2P or SERPs and also women who paid the lower stamp so they were paying less National Insurance contributions.
Now, here we have an image of the final section of the state pension forecast and as I've just mentioned, lots of people will have been contracted out of the additional state pension at some point in their career. It says on the form, the amount of additional state pension you would have been paid if you're not contracted out is known as the contracted out pension equivalent or COPE for short. You know what? I probably get asked about this as much as I do any aspect of the state pension. The COPE estimate is shown on your state pension forecast if you've been contracted out and is shown as a monetary figure.
Now this person here has a COPE estimate of £8.97 a week, but it's just that, it's an estimate, but where people really get confused with the COPE figure is knowing what they need to do with the number. People often think you need to take it off the new state pension forecast figure from the previous slide. So let me just clear that up. You don't. The COPE figure is just there for reference, it doesn't change the forecast at all.
If you've got clients who retired early and were contracted out, then it's unlikely that they'll have the full state pension. Topping up isn't normally an option, but one thing to think about is whether they're caring for grandchildren and could apply for specified adult childcare credits.
You might also be wondering if this person was contracted out. How come they're on track for the full new state pension then? Well, remember that someone used to have 35 years of full National Insurance contributions to receive the full new state pension. So, if they pay or they're on track to pay 37 years of National Insurance contributions and they're only contracted out for, say, two years, then they'll still have 35 years of full National Insurance contributions and, in turn will get the full new state pension.
Now, this was one of the most common questions we were asked by consumers. Should I top up my state pension? And you know what, it's mainly due to Martin Lewis and his campaign to explain the benefits of topping up state pensions. In fact, it was so successful it broke the DWP. But you know what, that was a good thing as it meant that the deadline was extended so, you know, more of your clients could be doing this.
Now, if you do go online and you get state pension forecast and find that you have missing years, you're not going to get a full new state pension and you're looking for guaranteed income and retirement, topping up via Class 3 National Insurance contributions is about the most cost-effective way to go about it. Admittedly, you know you're limited to how much you can get, but it is cost effective. Just for reference, buying an extra year of state pension via Class 3 National Insurance contributions costs £907.40.
And that will get you 1/35th of the new state pension, so approximately £303.90 per annum, increasing by that triple lock. Therefore, you only need to live three years to break even in most instances. If you're covered by the new state pension system, you can top up your National Insurance record for years from 2006 to 2007 onwards. You need to do this by 5th of April 2025 because after the date, missing years have to be topped up within six years.
Will I still get my state pension if I move abroad? Now this question again came up a lot in our state pension webinar.
And as you can see here, when you receive an increase in your state pension differs from country to country. If you live in the European Economic Area or Switzerland, you will not only receive your state pension but will receive increases. Likewise, the list of countries on the right hand side of the screen here. But there are a number of countries where you won't receive cost of living increases and these include Canada, New Zealand and Australia.
Right, I want to take a few minutes to talk about the interaction between the new state pension and the retirement living standards. For many pension members, the million pound question is, how much should I be saving into a pension? Although you'll be pleased to hear that for most people, it isn't a million pound answer. Now the ideal process may be to carry out income and expenditure analysis, which can then form the basis for a realistic discussion around expenses that will still be present in retirement. This in turn should lead you to the retirement income needed.
Now, assuming for a moment the client has no defined benefit pension, you then calculate the defined contribution lump sum needed to produce a sustainable income equal to the retirement income needs. You'd also build in the role the state pension plays because, for many people, it's likely to be their biggest source of income in retirement. Now that's all well and good for advised clients who have got advisers to map this out for them and help them to understand the amounts needed to achieve it. But there are two key things we know we need to consider in this discussion. First up, we know that most people, especially those in workplace pension schemes, don't have the benefit of face-to-face advice to help them with this. And the second point, we need to appreciate is that many non-advised people struggle with this. Even that first step of working out the income needed in retirement may be a bridge too far for some people, for too many of them it's just too hard, so they don't think about it.
Therefore, as part of the Royal London research on state pensions, we asked the question, have you ever worked out how much you need to live on in retirement?
Now I don't know about you, but I would have thought that the further from retirement someone is, the less likely they’d have done this. But from our research, almost 30% of 25 to 34 year olds say they have and even 22.2% of 18 to 24 year olds, which is slightly higher than those much closer to retirement, those from 50 to 69.
Now, I don't remember ever working out how much I'd need in retirement when I was in my early 20s, and that's despite the fact I was working in pensions, perhaps because it was so long ago I just can't remember that far back. But worryingly, over 70% of those age between 35 and 69 are the ones telling us they've never worked out how much they need. And I think this goes back to our point that most people don't know where to start, so they put it in their too difficult pile and then they never get round to it.
Of course, we could have quite a few people who will have defined benefits, especially those in the 50 to 69 bracket, and therefore they haven't worked out how much they need to live on, but they will have worked out how much they'll receive.
Now, just as a reminder, the DWP, they'll launch their new mid Life MOT website in July this year and it's predominantly there to help those aged 45 to 65 think about their future. Therefore, you know it's a good starting point for those who are non-advised, but may also focus their mind for some advised clients.
Another question we asked in our Royal London state pension research was the new state pension is £203.85 per week £10,637 per annum roughly. What you receive could be more or less depending on your National Insurance record. Do you think you could comfortably live off this amount each week during your retirement if it was your sole income? Now there's a clear pattern that the older you are, the less likely people think they'll be able to live comfortably if the state pension is their only income.
However, there's still a considerable percent of people who are either unsure or think they can live comfortably from only receiving the state pension. There's also a marked difference between those under 34, where roughly two fifths think they could live comfortably just off the state pension as income compared to about a fifth of those who are aged 50 to 69. I think we all agree that very few people could live comfortably if the state pension was their only income, even if they were receiving the maximum amount.
So, this begs the question, what income should individuals be targeting?
One potential solution to this, or you know at the very least something to ease the problem are the PLSA’s retirement living standards. These can remove the first step by giving an indicative retirement income need. Now is this better than a bespoke plan for the individual? No, of course it's not. Is it better than nothing? Well, I think so. Now in January 2023, the PLSA recalculated to the required values in the retirement living standards to reflect the current market and also the impact of inflation. And it's these updated figures you can see here.
Now just as a reminder, they created these living standards to help people picture what kind of lifestyle they could have in retirement. And the standards show what life in retirement looks like at three different levels. So there's minimum, moderate and comfortable living which you can see along the top. And what a range of common goods and services would cost for each level, which you can see underneath.
They further split this down into values for singles and couples and for living inside or outside of London. And what you're looking at here are the figures for couples who live outside London. I think the power of these retirement living standards lies in giving people a real sense of their likely expenses in retirement, and therefore the likely level of income needed, so they're particularly useful for members of the workplace schemes that you might manage who are less likely to get face to face advice, but who do need some kind of guidance to make the most of their pension saving.
Now, here's the equivalent figures for singles outside of London. I've been asked a number of questions about the retirement living standards in the past, so I just wanted to clear up a few things about them. First up, these are net amounts, so they are after tax. They don't include any ongoing rental costs, so you know that'll need to be factored in if rent will be continued to be paid by your clients.
They don't factor in any ongoing mortgage payments either. Now I guess this was understandable in the majority of people are targeted to pay off the mortgage before retirement and certainly by state pension age. However, we know many people have come to the end of the fixed rate mortgage and you know they've been faced with a massive increase in the mortgage interest rate. So banks and building societies that have offered to extend the term to help keep the cost down. Their altruism clearly knows no bounds then. This means you're likely to have to factor in ongoing mortgage payments for some of your clients post-retirement and maybe even post state pension age.
As part of our research, we asked the question do you think you'll be making housing payments either towards rent or a mortgage by the time you retire now, only 36.1% say they won't, which means 63.9%, that's almost 2/3 of people. Either are unsure if they'll still be paying rent or a mortgage when they retire, or think they will.
The retirement living standards have been used by more and more providers, including Royal London, to give indicative retirement income amounts especially for workplace customers who may not be benefiting from individual advice. But regardless of the target income amounts, the state pensions crucial to help people achieve their income goals, and hence why it's so important for clients to check their state pension forecast, work out if they're able to top up and or delay their state pension. Now I've put all the retirement living standard amounts into a table so you can see the equivalent figures for inside and outside London and this is for single people here.
We don't have time to look at all of them, so I'm just going to focus on the moderate outside of London, which the PLSA estimate will require an annual net income of £23,300.
Now we've converted the annual figure that £23,300 to lump sum by dividing it by 5.15%. That was the best annuity rate we could find for a single person, 66 years of age, escalating by 3% to give some inflation protection with a 5 year guarantee.
Now of course you can use a different figure if you feel that would work better, but we're really just looking for an indicative figure at this stage, so if we use that rate, then someone living outside London who's looking for a moderate income level in retirement needs to amass a pension pot of approximately £505,000 in today's terms to achieve this, which for many people will be completely disheartening and can put people off saving all together. Remember, this assumes someone is targeting 23,300 at age 66. But if they want to retire at say, 60, then they need to rate would be lower. And of course the resulting pot size higher.
I also want to highlight that on the website for the Retirement Living Standards, the PLSA showed predictive fund sizes as to achieve the levels of income. They assume the full fund value will be used to purchase an annuity so they don't take account of any PCLS available, nor do they take into account any other potential sources of income. So, for simplicity, we've just assumed the same here.
And I guess this makes sense because from our research, we know most people take their PCLS before taking income, sometimes as soon as they're legally allowed to do so, currently age 55. Therefore, we're going to assume PCLS has been taken and the remaining fund is used to purchase an annuity at age 66.
Now the good news is, many people will receive the full new state pension and therefore the fund required isn't nearly as high. Now in 23/24, the full new state pension, as we've already heard, is £10,636.60. You can then work out what the shortfall is by taking this state pension off, which is what we've done here. So the shortfall is £12,663 per annum, but you know, even if your average Joe or Joanne can identify the retirement income shortfall they have. I'm not so sure they know how to solve it, so let's see how we can simplify that part for them too.
Now to keep this as straightforward as possible, we've converted the shortfall and annual income, that £12,663 we've converted it to a lump sum once again by dividing it by 5.15%. So, I wonder if this is something you could create to go on a scheme website or similar. It gives further meaning to these PLSA figures for employees who, as we mentioned before, you know, they're less likely to be getting face to face bespoke advice and guidance is critical for these people. So you know, anything you can do to simplify things and enhance their understanding will be hugely beneficial.
So, you can see here if you use that rate, then someone living outside London who'll receive a full new state pension is looking for a moderate income level in retirement, needs to amass a pension pot of about £298,000 in today's terms to achieve this.
Now to you as financial advisers and probably most people who work in financial services, a pension pot of £298,000 sounds a reasonable figure. You know, it's a pretty decent pot size, but it's hardly off the scale for the people you deal with on a daily basis who are generally a bit wealthier than the average person. But we also need to bear in mind that the medium pension pot at 65 is around £81,000. So clearly many people aren't getting anywhere near this figure.
I want to mention briefly the value of the state pension, as again I don't think most clients will be aware of how valuable it actually is. To purchase the equivalent annuity in the open market would currently cost over £200,000.
I think it's really important for our customers and your clients to realise the importance of the state pension as this makes up a considerable proportion of most people's income in retirement.
It also highlights the importance of getting a state pension forecast as a Freedom of Information request by responsible life to the DWP found that of the estimated 3,057,000 people receiving the new state pension in November 2022, 649,000 women and 881,000 men received less than the full amount. I mean, that's 50%.
Perhaps some of these 50% could have had missed years where they could have topped up their state pension and we've already talked about how this is still a very cost effective way of securing income. So, it's very important for us not to assume everyone will get the full new state pension and for clients to factor this into their retirement income planning.
And you may be thinking what relevance does the marriage allowance have to state pensions and in reality, it may not for some of your clients, but for others it will be relevant. Now remember from a consumer duty point of view, we need to look for good outcomes for customers and avoid foreseeable harm. And therefore you need to look at the marriage allowance and see if this is going to be applicable to your clients. Now as a reminder, the marriage allowance lets a non-tax payer transfer, £1260 of their personal allowance to their spouse or civil partner, if they're spouse or civil part is a basic rate taxpayer.
Probably the obvious situation is where you have a married couple with one at home looking after children. Now you might not have any clients who are basic rate taxpayers, but the reason we're highlighting this in a presentation on state pension is it's also important to think about it if your clients are retiring or retired and they find themselves a basic rate tax payer with a spouse who is a non-tax payer.
Research shows that six out of seven higher rate taxpayers are basic rate taxpayers in retirement.
Possibly because so many people use drawdown and can therefore control their income.
Very simple case study brings this to life. So here we have Jane and Jim. Now imagine Jane has income from the new state pension of £10,636.60. Jim has income from the state pension and a personal pension totalling £20,070. Now they both have a personal allowance of £12,570. So as you can see on the slide as a couple, they pay tax of £1500, all of which it's all levied on Jim.
But if Jane claims the marriage allowance and transfers £1260 off her personal allowance to Jim, Jane now has a personal allowance of £11,310 and Jim gets a tax credit of £1260 on his taxable income. So, as you can see on the screen, Jane still doesn't pay any tax and Jim will only pay tax of £1248 rather than £1500 as we saw on the previous slide. So that's saving £252 in tax each year.
Therefore, we've provided a good outcome for Jim saving him that £252 a year and avoided foreseeable harm by stopping him from having to pay additional tax when he doesn't need to. And remember, if it's applicable, you can back date this for four years. So that's even more tax savings.
Right, finally, in this section we've got some planning points here. So first up, encourage your clients to go online and do their state pension forecast early enough I'd argue, that they actually have some time to do something about it if they do have a shortfall, do be a little bit careful though. I’ve spoken to a few advisers who've done the same test for the same client couple of different times, and they came up with different answers. Normally it is where contracting outs are involved. In fact some advisers told me they get their clients to complete to their BR19 form three times. And if two match up they go with that result. So maybe speak directly with the DWP if you want to be absolutely sure or, you could sanity check it against the National Insurance contribution history that comes out with the forecast. It is mostly correct though, especially if somebody's been contracted in.
Remember, early access to pension remains 10 years before state pension age. So when the state pension age was 65, access to occupation and personal pension benefits was 55. When state pension age went up to 66 in 2020, access to occupation and personal pension benefits remained at 55. Yeah, that's right it appears someone forgot this rule, but the Treasury were quick to rectify this and confirm pretty quickly that when state pension age goes to 67 from 2028 early access to occupation and personal pension benefits will increase to age 55.
I’ve spoken about this point already, but deferring taking the state pension may be a good option for some clients. And don't forget that some clients may be able to pay missed National Insurance contributions and buy further state pension, which is still one of the most cost effective ways for securing additional income. Now, if you're looking for any further information, we've got lots more detail on the state pension on our state pension hub, including this document for your clients. We've got detailed information on our adviser hub as well and a link to the state pension forecasting tool too.
And then here's some information sources relating to the state pension too, which you can refer to later on if you'd like to. Right, I'm now going to pass you over to Gregor who's going to take you through the rest of this session.
Thanks, Craig. And of course, thanks Justin as well and thanks to everyone for taking the time every day to join us for this webinar. As Craig said there, I'm Gregor. I'm one of the Royal London's protection development and technical managers and for the final part of our session today, I'm going to take us in a slightly different direction and we're going to take a look at the protection opportunities in lights of what we've already been discussing today.
Now, Justin actually teed me up perfectly because he referenced consumer duty and actually regardless of your opinion on consumer duty it is certainly putting more focus on the requirements to discuss clients protection needs and anything that I've seen in my time in the protection industry and actually both Craig and Justin have spoke today at length about retirement planning. And remember that without protection advice, your clients retirement plans could very quickly come crumbling down. And actually those retirement living stands that Craig just spoke about could become very unachievable if disaster strikes. So, let's take a look at the world of protection in a bit more detail.
Now for many, retirement will be a significant future objective and of course what is going to play a huge role in in their financial plans now going back to some of the state pension research and echoing some of the things that we've already looked at today, one of the other questions that was asked in the research was how do you currently plan to fund your retirement? And I've taken the top 8 answers. So, we've got workplace pension, state pension, cash savings, personal pension, partners income, part time earnings, investments and family inheritance. Now the reason I've taken the top 8 answer just because there's quite a common theme throughout the each of these 8 answers, or at least the majority of these 8 answers. And what do the majority of these have in common? Well, they're all dependent or majority are dependent on an income.
So, if for the majority of clients future financial, i.e. the retirement objectives are based on them having an income, what would the result look like if they faced a serious, not necessarily life threatening but a serious illness, premature death or they had to take an extended amount of time off work sick? What would that have in terms of an impact for both them and their family's ability to maintain their lifestyle? So, does a serious illness maybe mean a client has to take ill health, early retirement and access their pension provisions early? Would that put greater strain on the family's finances? Possibly more reliance on the state pension income on its own.
Our savings or partners income maybe needing to be used to cover essential household costs rather than being set aside for retirement. If investments are needed to be cashed in to cover household costs or ease any immediate financial concerns, are they performing as they should do? What if there was a period of market volatility? Might a family inheritance end up being swallowed up by potential IHD costs? You know, the scenarios are plentiful, but what's essential is to consider protection as a way of plugging many of these shortfalls in income.
Now, requirement planning will likely be supported by cash flow modelling systems in many scenarios and in recent months I’ve been speaking to a lot more advisers than ever before around using this type of tool to help highlight clients protection needs. Now this rough example that we're looking at on the screen, this little cash flow modelling scenario shows a dream scenario. So we've got a client that is building their wealth, building their retirement provisions. They maybe start to draw down on their pension around age 58 and as they start to do that, they start to reduce their working hours as well, hopefully allowing them to enjoy life a slightly slower pace, our yellow line that's really trying to represent their potential expenditures.
Now the thing that I want to point out here is, as this is a dream scenario, they'd be intending to retire about 68. The state pension starts, they're maybe able to fully retire, they might have other sources of income to help fund that period in their life. But how often do these dream scenarios work out? How often does life stick to the plan? And what would this forecast actually look like if the scenarios we just mentioned earlier were factored in? And could clients cope on their state pension alone.
Now, even if you don't use these types of systems, if you're maybe advising clients or mortgage clients, you'll probably still be considering where clients income might be coming from, particularly if they've got mortgages that the term extends beyond retirement or even beyond state pension age. The other really important thing is these discussions are very difficult without some awareness of risk and some of the impacts that risk will have on client’s finances. So, do clients actually understand the risks that they face?
Now the good news is some insurers can actually help you to get clients to see the risks that they face. So, let's just take a look at an example here. We've got Tess, she's 31, and she'll probably be retiring around age 68 when her state pension kicks, that's her current plans for the future. She's employed, non-smoker. What is the likelihood of certain risks applying to test before she reaches age 68? Well, looking at some of the figures, we can see that Tess has a 3% chance of passing away before age 68, before her state pension kicks in. She has an 18% chance of developing a serious illness before she reaches her state pension age, a 40% chance of being off work, sick for two or more months and a 53% chance of any of these risks happening before retirement, we’re well over a flip of a coin chance of any of these risks happening to Tess in her working career.
Now let's just take for a moment the risk of being off work for two more months. It's her highest probability, and as we've covered without her income, not only might later life plans be slowed down, but particularly for a younger client their current lifestyle
could be significantly impacted.
So, what are Tess's options? Well, she might have savings, but we're not really a nation of savers, are we? One in three UK adults have got less than £1000 set aside in savings. Employer sick pay schemes. Well, she may well have access to an employer scheme, but is it more generous than the statutory rates? What if she moved employer and does she actually know what her employer’s pay scheme provides? And again there may be state support available and then, for many, that may be the initial route that they look towards. So, what are some of the state options if you’re off work sick?
So, state support for incapacity generally comes in two forms. You've got statutory sick payer or SSP and we've got employment and support allowance or ESA, but actually even just having a high level awareness of some of the figures that we're looking at can be really powerful at bringing to life the lack of support that relying on state supports can actually give if we're off work sick long term. So statutory sick pay by law, must be paid by employers to employees when they meet the eligibility criteria generally that is where the employees been off work sick for at least four qualifying days in a row. And these are generally days that they're usually expected to be working.
Notification of that sickness must be made to the employer within seven days that seven calendar days of the first day of incapacity or as per the organisation own rules. Now, the employee must also have average weekly earnings of no less than the low earnings level for National Insurance contribution purposes for the 8 weeks prior to them becoming sick. The key other point is that they must be an employee. Self-employed individuals are not entitled to statutory sick pay.
Now in terms of the amount that you get through statutory sick pay, you're looking at £109.40 per week. It's paid from the 4th day of incapacity and it's paid for the best part of up to 28 weeks. After 28 weeks if the individual still incapacitated, then they may be able to apply for Universal Credit or they'll be able to apply for employment and support allowance, which nicely segways me on to our second main form of state benefit for incapacity and that is employment and support allowance or ESA.
Now, for those who have claimed statutory sick pay for the full 28 weeks and they are still incapacitated, then they can actually claim ESA for up to three months before their statutory sick pay ends. If you're self-employed, you can claim for ESA without having to wait for the 28 weeks, and there are three main categories of employment and support lines. We've got the assessment fees, so that's the period between the claims starting in the decision about the claimants’ long term incapacity being made. Those in this category receive a payment of £84.80 per week.
We've got the work-related activity phase now. These are individuals who are assessed as being unable to work now, but likely will return to work in the future. Around 12% of claimants fall into this particular category. And they again, they will also receive the £84.80 per week payment.
The third category is the support group. Now if you're in this category, you're deemed to be unable to work now and likely to be unable to work in the future. So individuals in this category do get a slight uplift, not by an awful lot. But they do get a slight uplift and that's £128.85 a week now around 67% of claimants tend to fall into this particular category.
The other 21% for anyone that's counting based on the 2023 report, were classed or assessed to be fit for work. Now the other really important thing is on average it took 126 days for the initial assessment. The initial decision to be made on an ESA claims that's 126 days that potentially £84.80 could be the weekly income being received, not an awful lot of money.
Now earlier, the question was raised, do you think you could live comfortably off the state pension during your retirement if it was your sole income? Thinking about today, state pension could be 5,10,20,30 years away. The question I want you think about just now is do you think you could live comfortably off the state sick pay from what we've just looked at now, if that was your sole income and actually when it comes to looking at this in a bit more in terms of a sense of an opportunity to discuss with clients, there's a couple that I want to look at in a bit more detail and those are self-employed clients and renters.
So, let's take a look at self-employed clients first. Now, Craig spoke earlier about how someone that's self-employed who maybe was never part of the S2P or SERPs might not qualify for the new full state pension. It's also worth remembering that self-employed individuals also pay less National Insurance contributions than someone that's employed and that can actually impact some state benefits as we've just alluded to. So, with less state benefits available and ultimately with no employer to rely on for sick cover, you could argue that self-employed people are the most at risk category of worker for losing their financial resilience if they're off work.
So why not help self-employed clients to not just see the risks that they face by referring to some of the risks to be looked at earlier, but also just to see the difference in National Insurance contributions that they pay versus an employed individual and whether that could help fund some form of income protection policy. So let's just take a look at another case study we've got. Jen, she's employed, she has an annual income of £80,000. Now as an employed individual she'll be liable for paying class one National Insurance contributions is that equates to in this scenario but £6123.53 per year.
Now, if we had a self-employed individual, we'd take the exact same individual exact same earnings as a self-employed individual with the with the situation we're looking at now, they're liable for paying Class 2 and Class 4 National Insurance contribution is now equating to about £5224.63 per year. So that is about an £898 a year difference. And again, we're assuming that there's no voluntary Class 3 national contributions being paid here.
Now as self-employed individuals don't have the luxury of a workplace pension. They don't have the luxury of employer funded sick pay schemes. Therefore, it is essential that they consider having access to replacement income to manage short term finances, but also plan for their retirement too. And actually that difference, that £898 difference, in this scenario or saving as I'm saying in inverted commas might be able to help fund an income protection policy.
Now renters were the second category that I thought could be a really important opportunity to discuss protection because renting was once considered to be a bit of a rite of passage for the young and the carefree, something that single people did in their late teens, early 20s while in the early days of a career. Accommodation might have been, let's say, a little bit rough and ready. But in those circumstances, that might not necessarily have mattered too much. Besides, renting is cheaper than owning and money saved by renting somewhere a little less desirable might have been able to go towards a deposit for a house. But how much of that is still applicable today? Is renting still considered to be that steppingstone to home ownership?
Looking at the graph on screen, looking back at home ownership or housing tenure, more accurately, over the last 30 years we can see a few particular lines of changes happened, and particularly I'm focusing on the pink line at the very bottom because that is the private rental sector, the number of individuals in private rented accommodation, and we can see there has been a steady rise over the last 30 years and a number of factors have influenced this; rise in house prices, lack of availability, affordability and actually even lack of access to some of the help to buy schemes that we've seen leave over the last few years.
But of course, the cost of living as well as a big factor and the cost of living crisis is impacting both renters and homeowners, and research that we've carried out at Royal London found that 68% of renters and 68% of homeowners who have found an increase in rent or mortgage payments are relying solely on their income to cover these costs, again linking back to the risks of losing that income if they were off sick or unable to work.
Of course, homeowners they've also been hit very hard by rising mortgage rates and in a recent This is Money article it actually reported historical high house prices are meaning more people are taking out longer terms to lower their mortgage payments. With nearly four times as many people taking out mortgages with terms that they'll still be paying into their 70s, and additional to that industry, research suggests that the number of people renting in retirement is actually set to treble in the next 15 years. And we can see on the screen just now the number about 19% of households in the UK at the moment are in the private rental sector. So, we echo in that point, we've seen that steady increase.
You may have read another This is Money article recently, earlier this year and it was a really interesting one because it highlighted a lot of what not only what we've been covering in today's session, but it really brought to life the importance again of the change in demographic that we're seeing and that in housing tenure. Now the former pension Minister Steve Webb features in the article and he actually addresses the risk that people may be relying heavily on their pension to pay for housing costs such as rent or mortgage repayments on top of their normal living costs.
We've also addressed the problem that rent, mortgages, social care and income tax are not generally used previously as a measure throughout the industry to factor in people's expected quality of retirement and what that may actually look like. So, if someone has to access their pension provisions early due to ill health. What would that mean for their later life provisions? Now I've touched on the importance of protection a few times already today, but it's just worth highlighting the huge disparity in those who are mortgage owning clients or individuals with renters, when it comes to what protection policies they have, because there is a huge disparity.
Now, mortgage owners, we've seen some of the stats that we've come across that about 63% of mortgage loan clients have life cover, whereas 29% of renters have life cover, 33% of mortgage owning individuals have critical illness cover, whereas 11% of renters have critical illness cover. 20% of mortgage owning individuals have income protection, whereas 6% of renters have income protection and 24% of mortgage owning clients do not have any form of protection, whereas 61% of renters have no form of protection, a staggeringly low and a concerningly low percentage there.
So where do we go from here? Where do we go from today's session onwards? Well, I think there's three immediate points from a protection perspective to consider. So firstly, how do you highlight the risks clients face and how certain life shocks could not only create financial and emotional issues now, but retirement provisions and plans for the future might be delayed or actually halted altogether? And consider how protection solutions, again income protection or family income benefit might resolve both short and long term financial woes?
Income protection, ultimately, is that way of replacing a percentage of your client’s income if they're unable to work, family income benefit a little bit different. It's relatively undersold, very cost effective and very versatile. That type of life cover, which pays out a monthly income rather than a lump sum. And it can be very useful for clients to replace lost income through illness or premature death. And finally, Justin referred to this a little bit earlier on at the start of the session. So if you aren't involved in the protection advice space, thanks to consumer duty, ignoring protection risks is no longer going to be tolerated.
And actually the protection gap really presents significant risks to the public, many of which are those risks we've looked at today. So, if you aren't discussing protection with clients, why not look at introducing them to a protection specialist? So that the conversation still happens somewhere down the line.
Now our learning objectives are back up on screen. Only now they're learning outcomes and just as we wrap up our session today, we've got the Royal London adviser site on your screen just now. adviser.royallondon.com. Please continue to use the Q&A box for any questions on what we've covered during our session today and we will be following up with everyone that's asked questions over the next few days. For ongoing questions and support from Royal London do you make sure that you're in touch with your usual Royal London account manager.
Just to remind you will be receiving an e-mail from Royal London later today with a link to your CPD questions relating to the webinar. Once you've answered them correctly, your certificate will automatically open. You'll be able to save it to your device and if you'd like to rewatch the session, it'll be available on our Royal London CPD hub very shortly where you'll be able to download a pdf copy of our presentation from there as well. Now, just on behalf of Justin, Craig and myself and everyone at Royal London, thank you so much for your ongoing support and thank you so much for taking the time out of your day to join us for today's webinar.
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