As all those involved in retirement planning will know, every penny counts when it comes to generating a pension income. This makes the recent news that, according to the DWP’s own estimates, as many as 134,000 people in the UK may have been underpaid their State Pension particularly cruel.
According to the National Audit Office, errors at the Department for Work and Pensions mean that an average £8,900 was not paid to those affected over a period that stretches back to 1985. Women have been particularly badly affected because reassessments of payments that should have been made on the death of a husband were not carried out.
The problem relates to the old State Pension system where married women could claim an extra payment worth 60% of the basic State Pension based on their husband’s record of contributions. A review is now taking place to trace those affected but only some are being fully paid. Others will only be able to claim for 12 months of missed payments.
A core element of clients’ pension income
For most clients, even the relatively wealthy, the State Pension will form an important part of their retirement income. What makes it so valuable is not simply the money it provides – currently a maximum £179.60 per week – but the fact that it is currently guaranteed and uprated by at least the rate of inflation every year. Retirees know that the State Pension can cover essential bills even if other sources of income are uncertain and prices rise.
Of course, guaranteed, inflation-proof income can be generated in other ways. Some individuals will be able to rely on defined benefit pensions but, as you’ll know from your everyday interactions with clients, such arrangements are becoming rarer and less generous. For clients with defined contribution pension pots, the only option is to purchase an inflation-linked annuity and this can be an expensive exercise. Indeed, it would take a savings pot of £320,000 just to replicate the maximum annual income from the State Pension of £9,339. This is based on current rates for a healthy 65-year-old purchasing a lifetime annuity that is uprated with RPI inflation.
Boosting a client’s State Pension entitlement
Ensuring clients are entitled to the maximum State Pension possible is therefore crucial. Obtaining a State Pension forecast will show what benefits have currently been accrued and whether additional National Insurance credits will be required to obtain the full State Pension. In addition, clients can access their NI record to identify any gaps that may be topped up by making voluntary NI contributions. Usually, you can only pay for gaps in your NI record for the last six years. However, assuming they are eligible, men born after 5 April 1951 and women born after 5 April 1953 have until 5 April 2023 to pay for any gaps in their record between April 2006 and April 2016. More details can be found on the Government website.
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