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Understanding the New State Pension (and what it means for widows and widowers)
Jun 11 2024
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By
Philip Feast
For a retired couple with full entitlements, the New State Pension is now worth a combined £23,004.80 per annum or just over £1,900 gross per month.
This is a significant amount of guaranteed income and can often make up a large proportion of a couple’s income in retirement, with the rest coming from other sources including workplace pension schemes, rental income, or their personal investments and pensions.
There is an old phrase, ‘two can live as cheaply as one’. This is clearly an exaggeration, but it has a kernel of truth. If we apply that in reverse, we could also say that it is not that cheap for someone to live on their own. It is key then to understand and plan for how the state pension income, and in turn your household income, will change if one of a couple passes away.
The UK state pension system has undergone significant changes in the last decade which we wrote more about here. There has been a period of transition from the old system to the new for those reaching state pension age on or after April 6, 2016. These changes also affect what happens to state pension entitlements on death.
Here’s an outline of the key differences:
Old UK State Pension on Death
Basic State Pension (BSP):
- Spousal Inheritance: If the deceased was receiving a BSP, the surviving spouse could claim a percentage of the deceased’s pension. This was possible if the surviving spouse did not already have a full BSP based on their own National Insurance (NI) contributions.
- Additional Pension (AP): The surviving spouse could inherit some or all of the deceased’s Additional Pension (also known as State Earnings-Related Pension Scheme/SERPS or State Second Pension/S2P).
Eligibility and Amounts:
- Contribution History: The amount a surviving spouse could inherit depended on the deceased’s NI contribution history.
- Percentage Inheritance: Up to 100% of the deceased’s BSP and between 50 and 100% of the deceased’s AP, depending on the date of birth of the surviving spouse and when the contributions were made.
New UK State Pension on Death (Post- 6 April, 2016)
New State Pension (NSP):
- No Direct Inheritance of State Pension: The new system does not allow the surviving spouse to inherit the deceased’s NSP directly.
- Protected Payments: If, at the point of change on 6 April 2016, the deceased had built up a pension under the old system higher than the full new state pension amount at that time (£155.65), the difference – the “protected payment” – was partly protected under the transitional arrangements.
Eligibility and Amounts:
- Protected Payments Inheritance: If the deceased reached state pension age after 5 April 2016, their spouse will inherit 50% of the protected payment.
Summary of Key Differences:
It is worth noting that the rules surrounding the old BSP were designed at a time where there were fewer women in the full-time workforce in favour of family responsibilities; men therefore typically built up a much greater state pension provision. Furthermore, men tend to predecease women so it was important for a likely female surviving spouse, who might have a lower state pension entitlement, to benefit from an adjustment based on their deceased husband’s National Insurance record.
The world had moved on long before the rules changed in 2016, however, in exchange for a higher NSP the deceased’s state pension will now usually stop on death. This can lead to a reduction in family income of at least £11,500. In addition, other incomes such as workplace pension benefits could be reduced by c. 50% too. It is unlikely however that the survivor’s cost of living will reduce by the same amount.
Planning Opportunities and Implications
What can be done to plan for this?
If you are a couple, make sure you understand what your income looks like in retirement when you are both alive, and how that might change in the event one of you were to pass away.
In line with this, consider carefully what your expenditure is now. What expenditure would change if one of you were to die, and what would stay the same?
If there is a shortfall, look at where this might be made up from. Many of our clients leave some slack in the withdrawals they make from their portfolios to be able to easily bridge any gap in their income on first death and for this to remain sustainable.
There are other considerations that can impact a couple’s position in retirement. These include the cost of care which can be hard to determine and plan for in full. Often, it is the surviving spouse that is more likely to need this and they would often realise the value of the family home to help fund it if needed.
Whilst death, and dealing with it, is a certainty, it is something that is hard to plan for because the when is the hardest thing to predict. No one wants to think about their own death. However, rather than burying your head in the sand, a solid understanding of the implications and a plan which will guide the surviving spouse’s decision-making process can promote peace of mind and remove any worry or uncertainty you might have.
Clearly, how income is impacted on death is an important area of planning, especially when it comes to the New State Pension. If you would like to discuss this in more detail, please get in touch.
Written by Philip Feast
General Disclosures: This article is based on current public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.Cornwall
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