State Pensions: Five client questions advisers should be ready for

Kimberley Dondo   0:00 – 00:31
Hello and welcome to the latest episode of the Money Talks podcast in association with Royal London. Today we're talking about one of those topics that sounds simple on the surface but quickly becomes more complicated once clients start asking real life questions - the State Pension. So I'm joined today by Craig Muir and Justin Corliss from Royal London. Thank you both for joining me today.

Justin Corliss   00:32 – 00:33
Hi, thanks for having us.

Craig M Muir   00:34 – 00:35
Thanks for having us along, Kim.

Kimberley Dondo   00:36 – 00:38
So yes, State Pensions. Craig, do you want to jump in with that?

Craig M Muir   00:39 – 01:25
Yeah, sure. At Royal London, the State Pension is probably the topic we get asked the most questions about. And you know what, I guess that makes sense as the majority of us will get some level of income from the State Pension, but you know what, there's a lot of confusion about it. The State Pension is often treated as a, you know, a given at State Pension age, but technically it's driven by contribution history by qualifying years, pre and post 2016 rules, contracted out deductions and in some cases inherited or protected rights. And those details can materially affect the amount of State Pension people receive. And from an advice perspective, it can have a significant impact on cash flow modelling, retirement timing, contribution decisions and survivor income planning.

Kimberley Dondo   01:26 - 01:42
So we're going to run through five of the most common questions clients ask, and more importantly, what advisers should listen out for behind those questions. So the first question is, how much State Pension will I get?

Justin Corliss   01:43 – 04:52
It's a good starting point, Kim, actually. The full rate of the new State Pension is £241.30 a week in the 26/27 tax year. But I should probably point out at this stage that you might see different figures for the annual amount of the new State Pension. And that is because different government departments calculate it differently. Now, the figure you'll normally see quoted, you've probably seen this, Kim, is £12,547.60, and that is simply 52 times the weekly amount of £241.30. Right, fine, nice and straightforward, yeah?

But if your State Pension forecast says that you're on track for a full new State Pension, it says the annual amount is £12,590.69. So why the difference? Well, the Department of Work and Pensions, the DWP, they take the weekly amount, they divide it by 7 to get the daily amount, and then they multiply the result by 365.25, which gives us £12,590.69. Now, the reason is that the Department of Work and Pensions, the DWP, they want to take account of leap years. So that's why they apply that extra 0.25. Then again, HMRC do it differently still. They take one week of the previous year's rate and 51 weeks of the current year's rate, which would work out to be £230.25 plus £12,306.30. And altogether, that works out to be £12,536.55. So, this is what is used for tax purposes. Now, I only point out in case, you know, your clients come to you, as an adviser with other figures and you wonder why they differ.

Now, of course, what I've talked about so far is for the full State Pension, but in reality, many people won't receive this full amount and on occasion, some people will receive more than this. It's actually calculated by reference to the individual's national insurance record. A client normally needs at least ten qualifying years to receive any new State Pension. For someone with no national insurance record before the 6th April 2016, 35 qualifying years are normally needed for the full new State Pension. For clients with pre-2016 history, their position is different because the transitional calculation compares the old system and the new system outcomes as at the 6th April, 2016, and then allows post-2016 qualifying years to build entitlement from that starting amount, subject to the full rate cap.

Kimberley Dondo   04:52 – 04:49
Okay, so the headline number is helpful, but it doesn't help or tell the full story.

Craig M Muir   05:00 – 05:28
Exactly. Yeah, the forecast is useful because it distinguishes between what's been built up so far, what could be achieved by State Pension age, and whether further qualifying years could improve the outcome. So, advisers should read it alongside the national insurance record, not in isolation. The planning questions really, whether the client's already at the maximum, whether full years will be added naturally, or whether there are gaps where national insurance credits or voluntary contributions could produce an uplift.

Kimberley Dondo   05:29 - 05:40
And the next question is where I imagine a lot of confusion comes in. I've got 35 years, so why is my forecast still lower than the full amount?

Justin Corliss   05:41 – 06:28
Yes, I'll come in on that one. Yeah, that is where the simple 35-year rule can be a little bit misleading. For anyone with national insurance history before the 6th April 2016, their starting amount was calculated under what are called transitional rules. Broadly, that calculation compared entitlement under the old basic State Pension system with what would have been due under the new State Pension rules as at that date. If the client had been contracted out, a contracted-out deduction could reduce the new State Pension calculation. That's why someone can have 35 or more qualifying years and still show less than the full new State Pension amount.

Kimberley Dondo   06:29 – 06:44
Okay, I'm just going to pause on that for now. Contracting out is one of those terms people hear but don't always understand, me included. So what does it mean in plain English?

Craig M Muir   06:45 – 07:36
Yeah, I’ll coming in on that one and it's not that easy to explain in plain English actually, but technically contractor out applied under the pre-2016 additional State Pension regime. During contractor out periods, the individual, and in many cases too actually, the employer paid lower national insurance or part of the national insurance value was directed into an occupational or a private pension arrangement. Now the policy logic was that the client was building a pension value outside of this additional State Pension. And then when the State Pension was introduced, those contract head out periods were reflected through the transitional calculation, which is why the forecast can be lower than the client expects. And this is where the adviser role becomes bigger than just explaining the forecast. A lower forecast should prompt advisers to reconstruct the pension history.

Kimberley Dondo   07:37 - 07:43
The next question I'm sure a lot of clients are probably asking is, when can I claim it?

Justin Corliss   07:44 – 09:19
Yes, it's a very good question, isn't it? Now, once again, the technical point, I suppose, is that the State Pension age is not fixed permanently at one age. Under the current legislated timetable, the State Pension age is increasing from 66 to 67. Yeah, many people will be aware of that. From April 2028, actually, truth be told, it's a gradual rise and it started back in April 2026, but it completes by April 2028.

There is, however, legislation in place under the Pension Act 2007 for a further rise from 67 to 68, and for this rise to take place between 2044 and 2046.

However, there's always a however, isn't there? As the Pension Act 2014 provides for a regular review of the State Pension age, at least once every five years, subsequent reviews might see a change in these plans. Future changes would require legislation, but advisers should still avoid using a generic assumption of what that age is going to be. The correct approach is to verify the client's individual State Pension age, especially during this period when their State Pension age is somewhere between 66 and 67, and then align that date with the cash flow plan, planned retirement date, pension crystallisation strategy, and expected earned income.

Kimberley Dondo   09:20 – 09:32
Okay. I don't like to look at the projections from what my particular age group might be for safe engine. I think the last time I looked it was like 77, but hey.

Justin Corliss   09:33 – 09:36
Okay. I'm sure it won't be as bad as that, but I do get your point.

Kimberley Dondo   09:37 – 09:41And so that timing can make a real difference to a retirement plan.

Craig M Muir   09:42 – 12:30
Yeah, yeah, it really can. You know, if the State Pension is going to begin late in the client's intended retirement date, the adviser really needs to model a bridging period. Now, that may involve sequencing taxable pension withdrawals, ISA withdrawals, cash reserves, part-time earnings, or defined benefit commencement dates. Now the sequencing matters because drawing more heavily from pension assets before State Pension age can affect sustainability, tax bands, allowance use and the client's exposure to market falls early in retirement.

One thing clients may not understand is that the new State Pension counts towards taxable income in the same way as most other pension income. Now whether any tax is actually payable depends on the client's total income and the amount of available personal allowance. If the State Pension is the client's only taxable income and remains within their personal allowance, there may be no tax to pay in practise. But that doesn't make it tax free. It simply means the client has enough allowance to cover it. Now this distinction becomes important as soon as the client has income from employment or maybe a workplace pension, a personal pension, maybe rental profits or savings interest outside tax shelters. This income will sit on top of the State Pension income, which will continue to use some or all of the personal allowance, making more of the additional income subject to a tax charge. So, you know, advisers should be careful with language here, as saying you won't pay tax on it is not the same as saying it isn't taxable. And that nuance matters when clients compare income options or maybe think about delaying their claim.

The first tax year in which the State Pension starts can therefore be messy. A client may have salary for part of the year, they might have, I don't know, redundancy pay, accrued holiday pay, partial year private pension income, and then the State Pension commences later in the tax year. Now because the State Pension is paid in arrears, and tax collection on other income may not immediately reflect the final position, underpayments can arise. So, clients who believe their payroll deductions were all sorted out can be surprised by a coding change or a later reconciliation. Now advisers can help by pre-empting this. You know, a simple year one cash flow forecast that maps taxable and non-taxable income by month can significantly reduce the confusion. And that's particularly helpful for the clients transitioning gradually out of work. You know, they have more than one pension source or, you know, they want to start flexible withdrawals before reaching State Pension age. I often think that tax friction is often a product of timing, not just an amount.

Kimberley Dondo   12:31 - 12:39
Right. So now let's move on to a very practical question, which is, can I increase my State Pension?

Justin Corliss   12:40 – 14:27
Potentially, yes. If the National Insurance record shows gaps, the client may be able to add qualifying years through, well, continued employment is probably the obvious one, or self-employment, but there's also National Insurance credits or voluntary Class 3 contributions. The key technical point is that a qualifying year is only valuable if it increases the individual's State Pension entitlement. Now I know that probably sounds really obvious, okay, but advisers need to establish whether the client is below the maximum, whether the missing year is payable, whether it sits within the permitted payment window, and whether the forecasting confirms an uplift.

Of course, the other means of increasing the State Pension, and it's been alluded to at least once earlier on here, is by deferring it. Okay, deferring the State Pension by nine weeks increases the amount by 1%, which works out at just under 5.8% if you defer for a full year and then take it as income rather than a lump sum. But whether this is suitable for a given client depends on a number of factors, including their likely life expectancy, other income levels, the need for additional guaranteed income, just to name a couple of them. Yes, deferring can mean a higher income when the State Pension does come into payment, but it's likely to take 13 years or more of the higher income payment to make up for the income that you missed out on in the year that you deferred. So there's definitely a trade-off there that needs to be considered.

Kimberley Dondo   14:28 – 14:42
So just to go back to the point about topping up national insurance credits for missing years, that sounds like something clients could get quite excited about. Is it always worth paying?

Craig M Muir   14:43 – 17:13
Not automatically. Your voluntary class 3 contributions, they can be attractive because the cost of buying a qualifying year may translate into additional inflation like the lifetime income. But the return depends on the client's existing entitlement, age, their health, or tax position, expected life expectancy and whether the contribution will actually increase the State Pension figure. In transitional cases, a missing year can sometimes be payable but still produce no increase. So, the decision should never be based on the existence of a gap alone.

An adviser should also consider national insurance credits because they're one of the most overlooked ways of protecting a client's State Pension entitlement. For advisers, I think the key is to integrate national insurance credits into the standard retirement planning process. The conversation is often most valuable with clients who have complex working patterns, such as parents returning after childcare, maybe self-employed clients with low profit years, higher paid people who didn't register for child benefit, unpaid carers, people approaching retirement after redundancy and couples where one partner has a much weaker or lower national insurance record than the other.

Now it can also be valuable for divorce planning, later life advice and intergenerational planning where grandparents provide childcare. So, I think that advisers should frame credits alongside voluntary national insurance contributions. Voluntary contributions, they can be attractive where they increase the State Pension, but they shouldn't be the first assumption. If a client could obtain credits for free, well, you know what, that may be a better outcome. Conversely, where credits are unavailable or insufficient, voluntary contributions may still be worth considering. So, I think that the process should really be forecast first, then national insurance record second, and then the contributions decision third.

The clients under the State Pension age they should usually seek confirmation from the future pension centre. But if they're over State Pension age, it's a different place they go, they go to the pension service. Advisers should document the expected uplift, the contribution cost and the implied break-even period and any reasons the client may choose not to proceed, even if the arithmetic looks favourable.

Kimberley Dondo   17:14 – 17:21
Okay. And just to clear up one related point, can someone top up a contracted-out year?

Justin Corliss   17:22 – 17:59
No, not by simply paying a top-up to convert that contracted out period into a non-contracted out year. The contracted-out adjustment reflects the structure of the old system and the pension value expected to have been built up elsewhere. However, additional post-2016 qualifying years can, in some cases, increase the client's new State Pension from their transitional starting amount up to the full new State Pension rate, provided, of course, that they've not already reached the maximum.

Kimberley Dondo   18:00 – 18:12
Okay. And our final question is one that can be sensitive, but is really important. So, what happens to the State Pension when someone dies?

Craig M Muir   18:13 – 19:10
Yeah, this is important because the new State Pension is primarily an individual entitlement and it's based on the person's own national insurance record. Now under the new system, a surviving spouse or civil partner will not usually inherit the deceased person's standard new State Pension. Now that's a significant difference from the assumptions many clients carry over from the older pension rules and it can create a material income shock on first death. Now there are some exceptions and they can involve inherited additional State Pension, protected payments or rights linked to the pre-2016 system. The precise outcome depends on factors such as the deceased State Pension age, the contribution record, whether they had protected payments, and the surviving spouse or civil partner's own entitlement. Advisers should treat this as a rules-based check rather than a, you know, a general inheritance assumption.

Kimberley Dondo   19:10 – 19:16
And from a planning point of view, this is really about survivor income.

Justin Corliss   19:17 - 19:54
Exactly. The adviser should model the household position on both a joint life and single life basis. That means identifying which income streams continue, reduce or cease on first death, State Pension, defined benefit pensions, annuity income, drawdown withdrawals, investment income, and any protection policies. The technical planning issue is not just the State Pension rule itself, it's whether the survivor's post-bereavement income remains sustainable after the loss of one person's pension entitlement.

Kimberley Dondo   19:55 – 20:03
So to tie this all together, what should advisers take away from these five questions?

Craig M Muir   20:04 – 20:40
I think the big takeaway is that State Pension questions should really be treated as technical planning prompts. A lower forecast may require analysis of transitional rules, contract throughout history and historic scheme membership. Perhaps a client asking a State Pension age question may require bridging income modelling and tax sequencing. A voluntary contribution question requires a value for money assessment, not just a gap check. And a death benefit question requires survivor income modelling rather than a simple assumption about inheritance.

Kimberley Dondo   20:41 – 20:49
So that feels like the key message here. Start with the client's question but listen for the planning issue underneath it?

Justin Corliss   20:50 – 21:24
Exactly. The practical adviser process is obtain the State Pension forecast, review the national insurance record, identify contracted out or pre-2016 complexities, test whether additional qualifying years will improve the entitlement, integrate State Pension age into the retirement income timeline, and stress test the plan on first death. That's where technical accuracy turns a State Pension discussion into a meaningful retirement planning advice.

Kimberley Dondo   21:25 – 21:45
And I think that is the perfect place for us to leave it for today. So, if you're advising clients approaching retirement, these five State Pension questions are useful prompts for deeper planning conversations. So, thank you for listening and we'll see you next time.

Justin Corliss   21:46 - 21:47
Thanks very much.

Craig M Muir   21:48 - 21:49
Thank you.