State Pension Reform – The FLC Guide

Posted by familylaw on 20th March 2015

This Blog is important for those considering divorce who have incomplete state pension contributions records or whose spouses have significant Additional State Pension (‘ASP’) funds.

The proposed state pension reforms due to take effect after April 2017 will affect millions of people, many of whom will be worse off under the new scheme. Few people have paid any interest to these changes.

The common perception is that the state pension is likely to be worth very little in the future and there is very little that we can do to influence it.

However, with the changes coming in, and the assumptions around retirement that are used in divorce, the reforms could substantially affect primarily women as the home maker in their retirement. Single/divorced women already count for the majority of pensioners who live below the bread line.

Under the new scheme, a full state pension entitlement would be worth about £144 (in today’s money). State pensions grow each year by inflation (they are legally linked to inflation measures) and are paid for life from state pension age (65/66/67) until death. Taking today’s average life expectancy would require a cash fund of £150,000 – £250,000 to purchase the equivalent pension to provide this level of income for one person.

State pension proposals

The Department for Work & Pensions have issued a documented proposal, “The single-tier pension: a simple foundation for saving”, which sets out the detail of the reforms. At 108 pages, it is complex and certainly belies its title. To save you reading this, below are some of the highlights:

• The reforms will not take effect until April 2017 at the earliest.
• If you reach state pension age before implementation of the reforms, you will retain your existing entitlements and benefits.
• If you reach state pension age after implementation of the reforms, your existing National Insurance record becomes a “Foundation Amount”. This in effect provides a level of entitlement to the new single tier pension.
• It will be possible to build up further entitlement in the future.
• The full new single tier state pension is likely to be £144 per week. The amount is most likely to be uprated by the highest of the following factors – growth in prices, 2.5 per cent or average earnings.
• Individuals will need 35 qualifying years of National Insurance Contributions or credits for the full pension amount. This will be translated as a percentage from your entitlement on the reform date.
• There will now be a minimum of 7-10 years to start to qualify for a proportion of state pension.
• There will be not be the facility to inherit state pension rights
• There will be no facility to derive state pension rights from a spouse or civil partner (subject to transitional provisions).

Divorce and State Pension

What are the implications of the reforms on those going through a divorce?

Pension Substitution.

Presently on divorce, if one party (typically a wife who has looked after the children) does not have a full National Insurance contribution record they may apply to substitute the National Insurance record of their former spouse for their own record in relation to all tax years during their working life. They can do this for the period up to the end of the tax year in which the marriage ended or the end of the tax year before they reach State Pension Age (SPA), whichever comes first. This needs to be claimed rather than being granted automatically. This is standard advice given on grant of the final decree in all divorce cases.

In addition, the former spouse’s Additional State Pension (ASP or formerly SERPS) record can be taken into account as a financial asset on divorce and shared by court order.

BEWARE: Post Reform.

• You will not be entitled to claim any pension substitution.

• You will not be entitled to a share of your former spouse’s Additional State Pension entitlement.

What now for pension sharing orders?

So what does this mean for those considering divorce now or in the future?

Difficult decisions may have to be made sooner than might otherwise have been the case.

Warning signs for those who believe they may be affected:

• Long marriages;
• Couples approaching retirement age after April 2017;
• Couples where one partner has given up a career or taken a long break to look after children;
• Where the other assets may not be sufficient to meet the immediate needs of both parties and compensate the disadvantaged spouse for his/her lost state pension rights;
• Where either or both parties may struggle or be reluctant to assist with the cost of topping up missing years for the disadvantaged spouse.

It might be argued that the solution is to act sooner rather than later, if it makes the difference between being able to take advantage of the present system of sharing and adjustment of state pension rights rather than risk the uncertainties of the forthcoming changes.

Pensions are complicated and more so on divorce. It is essential that you get expert legal advice. We here at the Family Law Co advise upon pensions, day in, day out so, if you are in any doubt about your position please do not hesitate to contact our divorce solicitors Plymouth or our legal experts in Exeter.

Need some advice? Get in touch today