When dealing with a relatively affluent client it is easy to dismiss the state pension as being largely irrelevant. Yet the state pension is a hugely valuable asset and it is easy to miss out on opportunities to make the most of it. It’s also vitally important purely as a ‘hygiene’ check to make sure that people are getting the right state pension.
Thinking first about the value of the state pension, the full flat rate is £179.60 per week, currently payable at age 66. We don’t know the future of the ‘triple lock’ on pensions indexation, but the law requires the pension to rise at least in line with earnings (except in the aftermath of Pandemics).
If having a state pension is like having an annuity from age 66 which pays £179.60 per week, rising at 3% per year, then that’s worth over £300,000 at current annuity rates. And, given that most people reach pension age as part of a couple, you can double that number and see that for a typical at-retirement client, they and their spouse are potentially sitting on over £600,000 in state pension rights between them. Viewed through that lens, it’s worth making sure state pension payments are correct and any opportunity to boost them is considered.
Missed opportunities
Unfortunately, I have come across cases where advisers have let their clients down when it comes to the state pension.
In one case both members of a couple were clients of the adviser and the wife was on an exceptionally low pension. The adviser failed to point out that the wife could have been getting a pension of over £4,000 per year based on her husband’s contributions and that this could have been backdated for over a decade. If the husband hadn’t spotted media coverage and taken action, this lady would still be on a pittance while the adviser concentrated on more ‘mainstream’ topics.
If having a state pension is like having an annuity from age 66 which pays £179.60 per week, rising at 3% per year, then that’s worth over £300,000 at current annuity rates.
Another messy area is state pensions and divorce. For those reaching pension age since 6th April 2016 (and coming under the new state pension) there is virtually no provision for those who divorce to benefit from the contributions of an ex spouse or civil partner. But those who come under the old system can benefit considerably.
For example, women who are divorced when they reach pension age could use their ex husband’s NI record up to the date of the divorce. Those who divorce post retirement (so-called ‘silver splitters’), have to notify DWP of their change of circumstances. But if they do so, they can then use their ex husband’s entire NI record and will often get a big uplift if they came under the old state pension system. Although it can take some perseverance to get the DWP to look at these things properly, the rewards can be huge, and a good adviser should be on the case.
A £1bn issue
In terms of checking state pensions more generally, we have recently uncovered the fact that around 135,000 people – mostly older women – have been underpaid state pensions and are owed lump sum repayments totalling around £1bn. In many cases this was because DWP failed to adjust pension entitlement either when their husband retired, when they were widowed or when they turned 80. I wonder how many of these 135,000 had financial advisers who simply assumed – as did the women themselves – that DWP would simply pay the right amount and accepted it without question?
I have come across cases where advisers have let their clients down when it comes to the state pension.
Finally, on a more positive note, the state pension also offers real potential for a cost effective boost to regular income for clients. In particular, recent retirees (and those coming up to pension age) who are short of the full flat rate but who have recent gaps in their NI record can fill those gaps at ‘knock-down’ prices.
Whilst the state pension is messy and complex, and hardly the most glamorous area of financial planning, getting it right must surely be a core duty of any financial adviser.
Steve Webb is a partner at LCP and former pensions minister
Great article. Surely advisers should be held accountable for helping all of their clients to maximise their state pension benefits?
The topic also highlights the inherent conflict of interest created by the (majority) of adviser firms that charge for their services based on the size of the clients investment portfolio. As Steve Webb has so clearly shown, a full state pension for a retired couple can be worth as much as £600,000 but any effort spent trying to maximise this figure typically makes not a jot of difference to the advisers’ fee. Surely, when receiving financial advice, consumers have a right expect that issues such as state pension maximisation will be fully considered? My fear is that, because of their charging structures, many will choose (be incentivised) to ignore this critically important matter. I hope I am wrong.
It wouldn’t surprise me if a great many advisers overlook informing married couples that they can one spouse’s unused Married Couple’s allowance to the other (using using form 575T).
That should read transfer one spouse’s unused Married Couple’s allowance to the other.