1196.A Category B retirement pension can consist of a basic retirement pension; or an additional retirement pension; or both. It is payable by virtue of a spouse’s qualifying years and earnings. It is paid to: married women; widows; widowers. In the case of a married woman a Category B pension consists of 60% of the spouse’s basic retirement pension. In the case of a widow or widower, a Category B pension may consist of a basic retirement pension of up to 100% of the spouse’s retirement pension (it may be combined with any Category A pension of the person’s own entitlement up to 100% of a full retirement pension payable to a single person). It may, with certain exceptions, also consist of half of a deceased spouse’s additional retirement pension.
1197.This section allows people who are entitled to more than one retirement pension (whether of the same category or not) to notify the Secretary of State in writing as to which one of those retirement pensions they wish to receive. Where such notification is received, that person shall be entitled to the retirement pension he has said he wishes to receive in respect of any week commencing after the date of the notice. In default of such notification, that person shall be entitled to whichever retirement pension is from time to time the most favourable to him.
1198.Upon Royal Assent, this section amended section 43(3) of the Social Security Contributions and Benefits Act 1992 (which concerns persons entitled to more than one retirement pension). Contributory benefits legislation was consolidated by that Act and although section 43 enabled a person to choose when there is entitlement to two retirement pensions of a different category, it did not do so where a person is entitled to more than one retirement pension of the same category. This mainly affects widows already entitled to a Category B retirement pension who then remarry. The amendment provides that where a person is entitled to more than one Category B retirement pension they can notify the Secretary of State in writing as to which of the Category B retirement pensions they wish to receive. In the event of no such notice, they will be entitled to the one which is most favourable to them. The Department for Work and Pensions made extra-statutory payments in these cases in line with the policy intention.
1199.A person is entitled to retirement pension from age 60 for a woman and age 65 for a man, providing he makes a claim for it. If a person does not claim his pension from that date he will not receive any pension for the period between pension age and the date of claim. He will instead qualify for an increase to his weekly pension from the point at which he does claim.
1200.A person may also be eligible for increments through electing to cancel his entitlement to retirement pension. For example, having drawn his pension at age 65, a man may choose to cancel his entitlement at age 66. A person may cancel his entitlement in this way once only. This means there are in effect two possible opportunities to earn increments – the first, by not claiming on reaching pensionable age; the second, by electing to cancel entitlement after claiming.
1201.The amount of the increase is calculated using a formula which results in an increase, or “increment”, of 1/7th of 1% of the weekly pension as at the date of claim, for each “incremental period” (equivalent to a week) in the deferment period. Increments of less than 1% cannot be awarded; therefore to qualify for an increase a person must defer claiming for at least seven weeks. The incremental rate is currently equivalent to approximately 7.4% of the weekly rate for each full year deferred. For example:
total number of weeks deferred = 52
weekly pension (basic plus additional) at date of claim = £90
amount of increase = 1/7 × 90/100 × 52 = £6.69
total weekly pension = £96.69
1202.Increments may normally be earned for a maximum of five years, and may be accrued on all components of the contributory state retirement pension i.e. Category A and B pensions and Graduated Retirement Benefit (the predecessor to the present earnings-related additional pension component of the state pension scheme). Increments may also be earned by deferring the shared additional pension,(2) and Guaranteed Minimum Pension(3).
1203.It is not possible to defer only part of the pension, for example, a person cannot decide to claim just his basic pension while deferring his additional pension (i.e. the pension derived from the State Earnings Related Pension Scheme (SERPS) or the State Second Pension).
1204.If a married man defers his Category A pension, his wife cannot claim a Category B pension based on his contributions until such time as he claims his pension. However, increments will accrue on both. Similarly, if he claims his pension but later decides to give it up to earn increments, his wife’s entitlement to Category B pension will also be cancelled for the same period (subject to her consent) and increments earned on it.
1205.If a woman is entitled to her own Category A pension, she can claim or defer it without reference to whether her spouse is claiming his pension. However, in cases where her Category A pension could be increased by virtue of her husband’s contributions and that increase is deferred because he is not claiming his pension, no increments would be payable unless she deferred her own pension as well as the increase.
1206.A woman who has attained state pension age and claimed her pension will be entitled to increments earned by her deceased husband provided they were married at the time he died, and she does not remarry before reaching state pension age. The inheritable proportion depends on which pension component the increments relate to. Broadly, she will inherit 100% of increments earned on the basic Category A pension, and between 50% and 100% of increments on the additional (earnings-related) pension component, depending on what percentage of the additional pension itself she is entitled to. In addition, one-half of increments on Graduated Retirement Benefit are inheritable.
1207.Until April 2010, when equalisation of state pension age for men and women begins to be phased in, only a widowed man is able to qualify for a Category B retirement pension on the basis of his late wife’s contributions. Similarly, a widower may only inherit increments earned by his late wife where he himself was over pension age at the time of her death.
1208.The 1995 Act removed the five-year limit on deferral and changed the weekly rate of increment accrual from 1/7th of 1% to 1/5th of 1% with effect from April 2010. The new incremental rate, equivalent to an annual incremental rate of 10.4%, effectively reduces the minimum qualification period to five weeks through the “one per cent” rule.
1209.In Chapter 6 of the 2002 Green Paper: Simplicity, security and choice: Working and saving for retirement (Cm 5677) the Government included proposals for amending the arrangements for those who defer their state pension, by:
bringing forward to 2006 the changes due to be introduced in 2010 (increasing the incremental rate, and abolishing the time limits); and
introducing the choice of a taxable lump sum payment as an alternative to weekly increments for life.
1210.There is no change planned to the rule on electing to cancel entitlement – as now, a person will be able to do this once only.
1211.The intention is now to advance the commencement date of the deferral changes to April 2005.
1212.Section 297 amends the Pensions Act 1995 to bring forward the commencement date of the 2010 changes to April 2005. No other substantive changes to the structure or calculation of increments are made.
1213.The lump sum will be an option only after a person has deferred for at least 12 months (in contrast to increments, which, following the change in accrual rate, will be payable after five weeks’ deferment). However, as with increments, there will be no upper limit on the length of time a person may defer and accrue a lump sum.
1214.The lump sum will be based on the pension a person would have been entitled to had they not deferred, plus a rate of return that will be applied weekly and compounded. The pension forgone will be calculated at the rate that would have been applicable in each week (or “accrual period”) for which the person defers.
1215.Both members of a married couple may defer their pension entitlement, either by deferring their own individual Category A pension, or as a consequence of the spouse, from whose contributions the other partner’s pension is derived, deferring his. Each member of the couple will have the choice of either increments or (providing the deferment period is at least 12 months) a lump sum, in respect of their deferred pension. So, for example, a woman may prefer an increase to her weekly pension, while her husband elects to receive a lump sum.
1216.If a deferrer dies before claiming it is intended that his surviving spouse will be able to choose to “inherit” either a lump sum or increments based on the deceased’s deferred entitlement (subject to provisions which restrict this right in respect of deferred pension based on the survivor’s own contributions). This choice will only be available if the person had deferred for at least 12 months. In all other respects, the conditions for “inheriting” a lump sum will be the same as for inheriting increments, that is, that the survivor was married to the deceased at the time of death, has attained state pension age and has claimed their own pension (and has not remarried before claiming their pension).
1217.Should the death occur before the spouse has attained state pension age, the lump sum as nominally accrued at the date of the deferrer’s death will be increased annually in order to broadly maintain its value in line with prices up to the point at which the surviving spouse claims his or her pension. The value of increments earned by a deceased partner is currently protected in a similar way.
1218.The calculation of the lump sum for survivors will reflect the proportion of increments that can be inherited; that is, 100% of the lump sum derived from the basic Category A pension, a proportion of the lump sum derived from the additional pension and one-half from deferred Graduated Retirement benefit.
1219.In order to maintain consistency with the existing rule relating to the inheritability of increments, before April 2010 a widower’s entitlement to an inheritable lump sum will be restricted to cases where the widower is himself over pension age at the time his wife dies.
1220.Subsection (1) substitutes section 55 of the Social Security Contributions and Benefits Act 1992 to reflect the introduction of the choice between a lump sum and increments in Schedule 5.
1221.The substituted section 55(3) replicates the current section 55(2) and defines when a person’s entitlement to their Category A or B pension is deemed to be deferred, that is,
if they have not made a claim for their pension (but otherwise would meet the entitlement conditions, i.e. they have attained pensionable age, satisfied the relevant contribution conditions etc), or
where entitlement to a Category B pension is derived from the spouse’s contributions, if the spouse has not made a claim for his pension, or
where the person has chosen to cancel their entitlement under section 54 of the Contributions and Benefits Act.
1222.Subsection (2) substitutes section 55C of that Act, which makes provision for increments where shared additional pension is deferred. The new section 55C(1) and (2) introduce a new Schedule 5A which provides for increments or a lump sum to be accrued on deferred shared additional pension (see commentary on Schedule 11 to this Act for the detailed explanation of these provisions).
1223.Section 55C(3) replicates the current wording of section 55C(1) which defines when entitlement to a shared additional pension is deferred (that is, where entitlement to Category A or B retirement pension is deferred and the person is not entitled to shared additional pension only because they have not made a claim for it).
1224.Subsection (3) amends Schedule 4 to the Pensions Act 1995 so as to bring forward from 2010 to 2005 the operative date for the increase in the rate at which increments accrue where a person defers their entitlement to a state retirement pension or a shared additional pension. This subsection also removes the time limits which currently operate to restrict the period over which a person may accrue increments by deferring their retirement pension.
1225.Subsection (4) introduces Schedule 11 to this Act which amends Schedule 5 to the Contributions and Benefits Act 1992 and related enactments and makes transitional provisions.
Since December 2000, it has been possible for the additional pension component of the state pension scheme to be shared as part of a divorce settlement. “Shared additional pension” is the term used for the weekly pension derived from the cash equivalent transfer value of a former spouse’s state additional pension.
Before 1997, salary-related occupational pension schemes could contract their members out of the State Earnings Related Pension Schemes (SERPS) by underpinning their benefits with a Guaranteed Minimum Pension which broadly reflected the pension which they would otherwise have built up in SERPS.
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