Chapter 3: State Benefits PDF

3/2 R05/July 2024 Financial protection Introduction The provision of social security benefits affects the need for private, voluntary financial planning in two major ways: the provision of State benefits r...

3/2 R05/July 2024 Financial protection Introduction The provision of social security benefits affects the need for private, voluntary financial planning in two major ways: the provision of State benefits reduces, to an extent, the need for private financial provision for illness, retirement or death; and the low level of State benefits emphasises the actual need for private financial provision. Where a financial adviser identifies a need for financial provision against adverse events Chapter 3 such as death or illness, this need should then be agreed with the client and quantified. Where certain State benefits will become payable following these occurrences, the need for private provision can be reduced by the likely amount of the benefit (i.e. why insure the same need twice?). Thus, it is essential that financial advisers are aware of the range of State benefits and the specific circumstances in which they become payable. Advisers also need to be aware of the range of factors that can affect the availability of benefits to an individual. These include means testing, strict eligibility criteria for benefits and the need for claimants to comply with the Department for Work and Pensions (DWP) requirements to avoid the loss of benefits via the imposition of sanctions. The State benefit system is designed to provide a minimal safety net, rather than to enable someone to maintain their in-work standard of living in the event of unemployment, illness or disability. Accomplished financial advisers highlight to clients, for example, both the need for financial provision during an extended illness and the mediocre level of State benefits. They then move on to an analysis of how the shortfall between State benefits and the client’s income need (based on current levels of earned income) can best be filled, such as through income protection insurance contracts. The COVID-19 pandemic brought State benefits into the national consciousness to a greater degree than ever before. Key terms This chapter features explanations of the following ideas: Attendance Benefit cap Bereavement Carer’s Allowance Allowance Support Payment Child Benefit Child Tax Department for Work Employment Credit (CTC) and Pensions (DWP) and Support Allowance (ESA) Housing Benefit Jobseeker’s Means testing New State Pension Allowance (JSA) Personal State Pension State Pension Credit Statutory Sick Independence age (SPA) Pay (SSP) Payment (PIP) Support for Universal Credit Working Tax Mortgage Credit (WTC) Interest (SMI) A Scope of social security and State benefits There is a very wide range of social security benefits paid by the UK Government, usually through the DWP. Some of these are paid simply because of the age of an individual or the individual’s state of health, while others are paid because of employment status or level of income. On the Web For details of all benefits available in the UK, visit: www.gov.uk/browse/benefits. The full list is somewhat bewildering, and an attempt to provide a complete explanation of even the more common benefits would fill a separate book. For this reason, this study text Chapter 3 State benefits 3/3 concentrates on providing a practical working knowledge of the main social security benefits which may affect the need and desire for further financial provision. This can usually only be made available by forward planning. For example, an individual may need to save money for a certain purpose, such as retirement, or insure themselves against a specific event, such as death or long-term illness. This chapter will explain the circumstances in which each benefit is paid, whether it is: a contributory benefit (i.e. only paid to those who have made certain National Insurance contributions (NICs)); or a non-contributory benefit, and whether the benefit is means-tested (i.e. paid only to Chapter 3 those with incomes or capital below a certain level). New means-tested benefits are labelled as income-based benefits. Students are not expected to memorise benefit rates, but they are expected to have a broad understanding of the benefits and be able to consider how the benefits might interact with products such as income protection. The limitations of social security benefits must be understood by advisers and clients. While there are numerous State benefits (as will be seen in this chapter), the level of benefit may not be enough for the client to maintain their desired lifestyle. Also, not all clients who would expect to be eligible, or think they deserve a benefit, will actually be eligible. There may be tight eligibility definitions, or the benefit may only be available for those with sufficient NI contributions. State benefits cannot necessarily be relied on and private provision of benefits via insurance and pensions will often be necessary. Question 3.1 What is a contributory State benefit? B The changing face of benefit provision The Welfare Reform Act 2012 introduced both the new ‘benefits cap’ and the transition of a number of legacy benefits to a single Universal Credit. The roll-out of Universal Credit has been beset with issues and was significantly delayed, but it was completed for new claimants in late 2018. The bigger job is now moving legacy claimants across to the new benefit and it is expected that this will take some time. The Government began in 2019 with an initial pilot of 10,000 claimants. It hopes to undertake the complete programme of migration between 2022 and late 2026. As of January 2024, some 6.4 million people were in receipt of Universal Credit, which was an increase of 500,000 from January 2023. On the Web Source: www.gov.uk/government/statistics/universal-credit-statistics-29-april-2013-to-11- january-2024/universal-credit-statistics-29-april-2013-to-11-january-2024 Given the amount of change, and the current ‘twin’ system of legacy benefits and Universal Credit, it is important for advisers to have a good working knowledge of both the old and the new systems. To assist advisers, this chapter is broken down into key headings: bereavement benefits; income-related benefits; disability-related benefits; child-related benefit and tax credits; help with housing costs; and Universal Credit. Where a benefit is being replaced by Universal Credit, we will highlight this, before we move on to look at Universal Credit in more detail later in the chapter. Given that there are still millions of people in receipt of these older legacy benefits, an understanding of their operation is important.  3/4 R05/July 2024 Financial protection Finally, we consider the State Pension. This is not often thought of as a State benefit, but it is one of the UK’s most significant sources of State assistance. C Bereavement benefits As well as being a time of emotional stress, bereavement is also one of considerable financial stress. To help the bereaved, the State provides short-term financial support. The system for these benefits underwent significant change in April 2017, with further changes being put in place during February 2023. Chapter 3 C1 Bereavement Support Payment Part 3 of the Pensions Act 2014 provided the legislative framework to replace the old system of bereavement benefits with a new, more targeted system for new claims starting from 2017/18. The Bereavement Support Payment is intended to provide a more uniform structure to help with the immediate costs caused by the death of a partner. It replaced the three legacy benefits (the Bereavement Payment, the Widowed Parent’s Allowance and the Bereavement Allowance). From 9 February 2023, the benefit was extended to include cohabiting partners, having previously only been available to spouses/civil partners. Under this system, support is provided as a lump sum of up to £3,500, followed by eighteen monthly instalments, with higher amounts for those with dependent children. This benefit has also simplified NIC conditions compared to its predecessor, is paid irrespective of age, and does not stop if the claimant remarries or starts cohabiting with another person. The rates for 2024/25 are unchanged from the 2023/24 levels: claimant without dependent child(ren) – lump sum of £2,500, plus monthly instalments of £100 for eighteen months; and claimant with dependent child(ren) – lump sum of £3,500, plus monthly instalments of £350 for eighteen months. Claims may be reduced if the partner died after 9 February 2023 and the claim is made more than three months after the partner's death. Bereavement Support Payment is paid tax free and is not included in the assessment of benefit income for the purposes of the benefit cap or the calculation of income-based benefits. Receipt of Bereavement Support Payment does not affect the bereaved person’s concurrent entitlement to contribution-based Jobseeker’s Allowance (JSA) or contributory Employment and Support Allowance (ESA). C2 Bereavement Allowance – pre-6 April 2017 The Welfare Reform and Pensions Act 1999 introduced equal treatment for widows and widowers, replacing a system that provided greater benefits for widows. The system took effect from 9 April 2001 and ran until 5 April 2017, comprising three main elements as follows. A Bereavement Payment This was a payment of £2,000 (tax free) payable on the death of either spouse/civil partner provided certain conditions were met. A Widowed Parent’s Allowance This was a taxable weekly benefit payable if: the deceased spouse/civil partner had a satisfactory NIC record, or their death was caused by their job; and the survivor is entitled to Child Benefit for a child or, in the case of a woman, is expecting her late husband’s baby or late civil partner’s baby (with whom the survivor was pregnant from fertility treatment). Chapter 3 State benefits 3/5 The allowance included: a basic payment, currently £148.40 a week (2024/25); where the individual was widowed before 6 April 2003, an allowance for each child (£16.95 for each additional child in 2024/25, although a lower rate of £8.00 a week applies to the first child if Child Benefit is being paid). For those widowed on or after 6 April 2003, Child Tax Credit (CTC) payments are payable; and additional S2P and SERPS, if the deceased spouse/civil partner was a member. A Bereavement Allowance Chapter 3 This was a taxable benefit, payable for 52 weeks after the spouse’s/civil partner’s death provided: the deceased spouse/civil partner had a satisfactory NIC record, or their death was caused by their job; the surviving spouse/civil partner is aged at least 45 at the date of death but under SPA; and the surviving spouse/civil partner is not entitled to a Widowed Parent’s Allowance. For 2024/25, the maximum level of payment is £148.40 a week for those aged 55 or over at the date of their spouse’s death. For surviving spouses/civil partners aged between 45 and 54, there is a partial payment varying between £44.52 and £138.01 a week. Bereavement benefits cease on remarriage or cohabitation, or on reaching SPA. All eligible widows and widowers receive the Bereavement Payment, but if they are under 45 and have no dependent children, there are no other bereavement benefits payable. Both Widowed Parent’s Allowance and Bereavement Allowance are collected under the benefit cap. Question 3.2 What benefits are available to one spouse or partner on the death of the other, assuming they have no children and meet requirements? D Income-related benefits Income-related benefits are not normally available to anyone with capital over £16,000 and are reduced by £1 a week for every £250 of savings (or part thereof) below this limit but in excess of £6,000. Means testing takes account of not only the claimant’s income and capital, but also the resources of their spouse/civil partner if they are living together, or of anyone cohabiting with them on that basis. These rules apply to all means-tested and income-based benefits. D1 Income Support Income Support is a means-tested benefit payable to individuals aged between 16 and SPA. It is no longer available to new claimants, who must instead claim Universal Credit, but remains in force for legacy claimants who: are not in full-time study (with some exceptions); have a low income and no more than £16,000 in savings; are working less than 16 hours a week, or whose partner is working less than 24 hours a week; and are not receiving either Jobseeker’s Allowance or Employment and Support Allowance. Refer to More on these benefits in Working Tax Credit on page 3/11, Jobseeker’s Allowance on page 3/6 & Employment and Support Allowance on page 3/6 Income Support is generally payable to those who meet the above criteria and have either childcare responsibilities, usually for a child under five, or caring responsibilities.  3/6 R05/July 2024 Financial protection The benefit is not generally taxable, but could be taxable if the claimant is on strike or involved in a trade dispute and is one of a ‘couple’, i.e. married, in a civil partnership or cohabiting as if in such a relationship, and is receiving benefit for their partner. Be aware Income Support is one of the benefits being replaced by Universal Credit. D2 Jobseeker’s Allowance Chapter 3 Jobseeker’s Allowance (JSA) was the main benefit for those out of work and looking for a job, though one form of it has been replaced by Universal Credit for new claimants and many legacy claimants. Students and those under age 18 cannot normally claim JSA, nor can those over SPA. Claimants must be able to show that they are fit for work, available for work, ‘actively seeking employment’ and have made a claimant commitment. The new-style JSA is a contribution-based benefit, dependent on the payment of sufficient employees’ NICs. It is not means-tested but is payable for a maximum of six months. The basic weekly rates for single people on a contributions basis in 2024/25 are: under 25: £71.70 per week; aged 25 or over: £90.50 per week. If the claimant is still unemployed after six months or does not have the relevant NIC history, new claimants may be entitled to Universal Credit. Legacy claimants may have moved on to income-based JSA. The amount of income-based JSA depends on the claimant and their partner’s income and savings. Both forms of JSA are taxable. Be aware Income-based JSA is being replaced by Universal Credit. Question 3.3 After what period does Jobseeker’s Allowance become means-tested? D3 Statutory Sick Pay Employees who earn enough to pay Class 1 NICs will usually receive Statutory Sick Pay (SSP) if unable to work due to sickness for at least four or more days in a row. The benefit is not means-tested and is paid by the employer. SSP is taxable as earned income and the employee must also pay Class 1 NICs on the payments just as if they were earnings. In 2024/25, the rate of SSP is £116.75 per week. To qualify, the employee’s gross earnings have to be £123 per week or more. The benefit is only payable for up to 28 weeks; anyone still sick after this period can claim Employment and Support Allowance. Question 3.4 Who pays SSP? D4 Employment and Support Allowance Employment and Support Allowance (ESA) is paid to people unable to work due to illness or disability, with the stated aim of helping them return to work. Like JSA, ESA was traditionally paid in two forms – contribution-based and income-based – with the latter being replaced by Universal Credit. Contributions-based ESA is now known as ‘new-style’ ESA and is not means-tested, is dependent on the claimant’s NIC history and is taxable. Conversely, income-based ESA does not depend on NICs, is means-tested and is not taxable. Chapter 3 State benefits 3/7 ESA is split into two phases: the assessment phase and the main phase. For employed people, SSP continues to apply for the first 28 weeks of incapacity before an individual can claim ESA. Like incapacity benefits, ESA will cease at SPA. Employed people will enter the assessment phase when SSP ceases after 28 weeks. For others, including the self-employed, it will be three days. Once a claim is initiated, a 13-week assessment phase then starts. During this period, the claimant is paid up to £90.50 a week in 2024/25 (lower rates apply to those under age 25, and higher rates to couples and those on income-related ESA). The assessment phase may be extended, for example, where it is not possible to complete the assessment in 13 weeks Chapter 3 because the individual is too ill to attend a face-to-face examination. In these circumstances, however, the appropriate main phase benefit rate will be backdated to the start of the 14th week so that the claimant does not lose out. During the assessment period, the claimant completes a questionnaire and attends an assessment centre where a state-appointed doctor (but not the claimant’s own GP) or nurse determines eligibility for ESA. If the claimant is able to do some work, the work capability assessment determines what work they can do and what support they will need. Exemptions apply to certain groups, e.g. people who are terminally ill, who will be fast-tracked into the support group. The support group – this group is unable to work. From week 14 they receive up to £138.20 a week (in 2024/25), or potentially more if they are receiving income-related ESA or Universal Credit. Someone in this group who qualifies for new-style ESA can continue to receive this indefinitely, even if they are not eligible for income-related ESA or Universal Credit. The work-related activity group – since April 2017, claimants in this group will continue to receive the same basic level payment paid to over 25s during the assessment phase. This is the same level as JSA – in this case, £90.50 per week. Extra premiums – claimants who qualify for the legacy income-related ESA may also receive enhanced disability premium, severe disability premium, carer premium and pensioner premium. Housing costs may also be payable as part of the income-related benefit. This is all consistent with the way Universal Credit operates. Claimants in the work-related activity group are required to engage in mandatory work- focused interviews, starting from week eight of their claim. If the claimant does not participate, sanctions can be applied reducing their benefit entitlement. Most of those who receive the ESA (around 90%) enter the work-related activity group, while the remaining 10% with more severe health conditions enter the support group. They are not required to engage in work-related activity unless so desired. Be aware Income-based ESA is being replaced by Universal Credit. On the Web The Government has a dedicated website about ESA. Visit: www.gov.uk/employment-support-allowance. Reinforce The focus of ESA is to support people in getting back to work, rather than simply paying people who are off work. Other State benefits may also be payable, depending on circumstances and age, but generally most working people could expect to be worse off if they have to rely on State benefits. Income protection insurance can pay out significantly higher benefits, may provide additional help and may have a more generous qualification level than State benefits. In addition, benefits from individual income protection plans are normally tax free.  3/8 R05/July 2024 Financial protection E Disability-related benefits E1 Personal Independence Payment Personal Independence Payment (PIP) was introduced by the Welfare Reform Act 2012. It replaced the Disability Living Allowance (DLA) for eligible working age people aged 16 to State Pension age (SPA), though DLA continues to be paid for under 16s. It is tax free and is not means-tested or based on the claimant’s NIC history. PIP comprises a daily living component and a mobility component. Chapter 3 The rates for 2024/25 are as follows: The daily living component is payable per week at one of two levels: – enhanced rate: £108.55; and – standard rate: £72.65. The mobility component is also paid per week at one of two levels: – enhanced rate: £75.75; and – standard rate: £28.70. To qualify, the claimant must have difficulty with activities of daily living or mobility that has lasted for at least three months and is expected to continue for at least nine months. Alternatively, the claimant may qualify if they are terminally ill and not expected to live for longer than six months. A person may be eligible for the daily living component if they need help with: preparing or eating food; washing and bathing; dressing and undressing; communicating; managing their medicines or treatments; and making decisions about money. They may also be eligible for the mobility component PIP if they need help with leaving the house and moving around. PIP is based on an assessment of individual need. The assessment focuses on an individual’s ability to carry out a range of activities vital to everyday life. Information is gathered from the individual, as well as from healthcare and other professionals who work with and support them. Most people are also asked to attend a face-to-face consultation with a trained independent assessor as part of the claim process. On the Web For further information, visit: bit.ly/2tojxkl. E2 Disability Living Allowance DLA is a tax-free benefit for people under SPA who need personal care, help in moving about or both. From April 2013, PIP replaced the DLA for disabled people aged between 16 and SPA. However, because of the long-term nature of some conditions, many current claimants (including all of those under 16) are still claiming DLA rather than the newer PIP. DLA comprises a care component and a mobility component. It is not means-tested or based on the claimant’s NIC history. The rates for 2024/25 are given below: The care component is payable per week at one of three levels: – highest rate: £108.55; – middle rate: £72.65; and – lowest rate: £28.70. Chapter 3 State benefits 3/9 The mobility component is payable per week at one of two levels: – higher rate: £75.75; and – lower rate: £28.70. The key facts relating to this benefit are: The individual must satisfy the criteria for three months and be likely to do so for a further six months. Once eligibility is proven, the benefit is paid for as long as the condition persists (up to SPA). Chapter 3 It is based on disability, not financial ability to pay or NIC record. It is tax free. Payment of the care element is suspended if the claimant is admitted to a hospital or a care home financed by the State or local authority for more than four weeks, but the mobility element will always continue. Terminally ill people qualify without having to satisfy the three-month rule. In Scotland, individuals who receive free personal care or local authority assistance will cease to receive DLA after four weeks. This does not apply to those who receive nursing care or who self-fund. E3 Attendance Allowance Attendance Allowance is payable to people aged over SPA who have been suffering from severe disability for a period of six months or longer. Two levels of benefit are available: a higher rate of £108.55 (2024/25) if care is needed on a 24-hour basis; a lower rate of £72.65 (2024/25) if care is needed by night or by day, but not both. The other key facts about Attendance Allowance are that it is: not taxed; paid on top of other benefits and is not means-tested; not based on the claimant’s NICs history; and not available while a person is in an NHS hospital or a local authority-funded home. Attendance Allowance is usually ignored for Income Support or JSA claims but is discontinued after four weeks for all local authority-funded care home residents. Although, to qualify for the allowance, the claimant must normally show that they have needed care for six months, there are special rules for people suffering from a terminal illness and they receive the higher rate of allowance. Attendance Allowance or the care component of DLA stops after four weeks where a person permanently enters a care home under funding arrangements made by their local authority. People who make their own arrangements for residential care can continue to receive the Attendance Allowance. In Scotland, individuals who receive free personal care or local authority assistance will cease to receive Attendance Allowance after four weeks. This does not apply to those who receive nursing care or who self-fund. E4 Carer’s Allowance Carer’s Allowance is a taxable benefit for those of working age who spend time caring for someone severely disabled who receives DLA, PIP or Attendance Allowance. For 2024/25, the benefit is £81.90 per week. The carer must not have net earnings of more than £151 per week (after certain deductions have been made) or be in full-time education.  3/10 R05/July 2024 Financial protection F Child Benefit and tax credits F1 Child Benefit This is the principal benefit payable to people who are responsible for a child under the age of 16 or who is aged under 20 and in full-time education. They can be birth, adoptive or foster parents. It can begin as soon as the child is born, and is payable as a flat-rate weekly amount for each child. The payment for the first child (£25.60 per week in 2024/25) is greater than the payment for each subsequent child (£16.95 per week). Chapter 3 On the Web Source: www.gov.uk/government/publications/rates-and-allowances-tax-credits-child- benefit-and-guardians-allowance/tax-credits-child-benefit-and-guardians-allowance This benefit is non-contributory, is not means-tested and is tax free. If a parent has not claimed the benefit when entitled, a claim can be backdated for up to three months. Entitlement to this benefit is not affected by any other benefits received by the claimant. The obvious relevance of this payment for financial planning purposes is that the level of Child Benefit should be taken into account when calculating a household’s regular income. In particular, it should be noted when it is scheduled to finish and that while the benefit itself is tax free, the High Income Child Benefit charge could apply. F1A High Income Child Benefit Charge Child Benefit is effectively withdrawn for high-income households. The charge applies only to households (regardless of marital status) where at least one parent or partner has an ‘adjusted net income’ of over £60,000 a year in 2024/25. This is an increase on the previous threshold of £60,000 which applied in the 2023/24 and previous tax years.This is an increase on the previous threshold of £50,000 which applied in the 2023/24 and previous tax years. Where both parties have an income over £60,000, the charge only applies to the person with the higher income. The charge is 1% of the amount of Child Benefit for every £200 of income that exceeds £60,000. A taxpayer whose income is at least £80,000 will be liable to a charge equivalent to a full amount of Child Benefit. This means that in 2024/25, basic rate taxpayers will no longer be impacted by the charge, with the higher rate threshold sitting at £50,270 and the high earnings threshold now above this limit. Importantly, the primary caregiver is still entitled to claim and will receive Child Benefit tax free and without means testing. However, the higher earner in the household will suffer an additional tax charge to recover it. In this sense, Child Benefit technically remains a non-means-tested benefit. It is possible for the person entitled to receive Child Benefit payments to make a request to stop them, to avoid themselves or their spouse/partner incurring the High Income Child Benefit Charge. Example 3.1 Based on a full tax year, Child Benefit for families with two children is currently £2,212.60. For a taxpayer whose income is £64,000, the charge will be £442.60, i.e. £22.13 for every £200 earned above £60,000. For a taxpayer whose income is £80,000 or more, the charge will be £2,212.60. F2 Tax credits Child Tax Credit (CTC) and the Working Tax Credit (WTC) are currently payable by HM Revenue & Customs (HMRC). They will be administered by the DWP with the full introduction of Universal Credit. As with State benefits, eligibility for CTC and WTC is based on household income. Both CTC and WTC are available to supplement the income of households where at least one member is undertaking paid work. In addition, benefit claimants must make a CTC claim in respect of any dependent children. Chapter 3 State benefits 3/11 Tax credits are a legacy benefit and 2024/25 is the last year they will be paid. With effect from 6 April 2025, they will be entirely removed, with Universal Credit taking over for those under State Pension Age (SPA) and Pension Credit for those over SPA. On the Web Source: www.gov.uk/government/publications/rates-and-allowances-tax-credits-child- benefit-and-guardians-allowance/tax-credits-child-benefit-and-guardians-allowance F2A Child Tax Credit Chapter 3 Parents with children living with them, aged under 16, or between 16 and 19 and in full-time education, can claim the family element of CTC worth up to £545 in 2024/25, provided their first child was born prior to 6 April 2017. On top of this, eligible parents can receive the child element at a rate of £3,435 for each child. There is also an extra payment of £4,170 for each disabled child and, on top of this, an extra payment for each severely disabled child of £1,680. Importantly, since April 2017, Child Tax Credit elements are targeted at the first two children. This means that unless an exemption applies, anyone having a third child after this date will not be able to claim tax credits for that child; claims for children born prior to April 2017 will continue to be paid. CTC must currently be claimed from HMRC, and claims cannot be backdated by more than one month. The tax credit is normally reduced by 41p for every £1 of income over £19,995. For a couple (which includes a couple who is neither married nor in a registered civil partnership), the tax credit is based on joint income. Any reduction in taxable income achieves a high percentage benefit in terms of saving tax on the income plus increased entitlement to tax credit. For example, each £1 reduction in income taxed at 40% saves 81p (40p tax saved plus an extra 41p in tax credits). Either or both partners can make a personal pension payment to reduce joint income. Families with lower income, high childcare costs, several children or children with disabilities may be entitled to additional elements of CTC and WTC. This can mean that some families with income above the higher rate tax threshold of £50,270 in 2024/25 can still receive some tax credits. Be aware Tax credits and Universal Credit cannot be claimed at the same time. F2B Working Tax Credit WTC is a payment to top up the earnings of working people on low incomes, including those who do not have children. It is payable to: those responsible for a child, who themselves are over 16 and work at least 16 hours per week; those without children, who themselves are over 25 and work at least 30 hours per week; and those without children, who themselves are over 16, work at least 16 hours per week and have a disability. The amount varies according to the number of hours worked, whether there is a child, whether the claimant is single or part of a couple, and their total income (joint for couples). There are extra amounts for those with a disability and a child-care element for those paying for registered or approved child-care. The child-care element is reduced progressively for those with incomes over £19,995 a year. The credit is currently paid directly by HMRC for employees and the self-employed. Couples can decide which one of them will get the credit.  3/12 R05/July 2024 Financial protection Be aware Tax credits and Universal Credit cannot be claimed at the same time. Question 3.5 How many hours must someone work a week to qualify for WTC, assuming they are aged over 25, have no children and do not have a disability? Chapter 3 G Help with housing costs The benefit system can provide a safety net for those who need help with housing costs. Where the claimant is renting their home, they may claim Universal Credit or Housing Benefit. Those who are paying a mortgage may be eligible for help in the form of Support for Mortgage Interest (SMI) which is now paid as a loan. Through the State Pension Credit system, those over SPA may also be able to claim further assistance with mortgage and other housing costs. G1 Housing Benefit Housing Benefit is a means-tested State benefit to help those in rented accommodation to meet the cost of their rent and certain other costs. New claims can only be made by those who have reached State Pension Age and those who are in temporary, sheltered, or supported housing. Some legacy claimants remain on housing benefit pending the transition to Universal Credit. On the Web Source: www.gov.uk/housing-benefit Where eligible, a claim for Housing Benefit may be made whether the individual is renting from a local authority, a housing association or a private landlord, though the rules do differ slightly depending on who the landlord is. The amount that may be claimed is dependent on a number of factors, including the age of the claimant, the location of the property and the level of rent. Refer to See Benefit cap on page 3/14 Entitlement to certain other means-tested benefits – such as pension guarantee credit can automatically ‘passport’ a claimant’s entitlement to Housing Benefit. The overall amount of benefits payable to an individual is, however, limited by the benefit cap. Where total benefits exceed this amount, the level of Housing Benefit may be restricted. Further restrictions may be imposed on a claimant where the property is deemed to be too large for their needs. This restriction has become colloquially known as ‘bedroom tax,’ but is more properly known as the ‘under-occupancy charge.’ Where the landlord is a local authority or a housing association, the benefit will usually be paid directly to the landlord. Where the letting is a private one, the benefit (local housing assistance) will be paid to the claimant. Be aware Housing Benefit is being replaced by Universal Credit and has already done so for the majority of new claimants. G2 Support for Mortgage Interest (SMI) In strictly limited circumstances, the DWP will help people if they are unable to pay their mortgage. This system underwent a complete change from 6 April 2018 with benefit being replaced by the ability to apply for a loan. The loan is repaid with interest when the house is later sold, ownership is transferred, or on death. Partial voluntary repayments of at least Chapter 3 State benefits 3/13 £100 can be made at any time and a no-negative equity promise means that any loan in excess of the property value will be written off on death. Those who were in receipt of benefit prior to this point stopped receiving payments as benefit and transitioned to the new loan-based arrangement. For all mortgages, the DWP will pay the interest on up to £200,000 of mortgage borrowing at a standardised rate on a mortgage (but not any capital payments). The standard interest rate is set at a level equal to the Bank of England’s published monthly average mortgage interest rate – the rate as of March 2024 is 3.16%. It will change only if the published rate changes by 0.5% or more. A waiting period of three months generally applies to those on Universal Chapter 3 Credit before a claim is accepted. On the Web Source: www.gov.uk/support-for-mortgage-interest/what-youll-get Pension Credit recipients can also claim SMI: Only the first £100,000 of any mortgage is covered. There is no waiting period before SMI is paid, nor are there time limits on the claim. Support is provided only in respect of interest on the house purchase element of the loan. This excludes any borrowing for the purposes of home improvements, unless these are essential to make the property fit for human occupation. Interest on arrears is also excluded. In effect, the DWP assumes that people have taken out suitable cover, e.g. mortgage payment protection insurance (MPPI), and provides benefits only to those who have been unable to work for a long time and who have very limited capital resources. H Universal Credit and the benefit cap As we have already seen, benefits are undergoing significant changes. Many of the benefits covered in earlier sections are already closed to new claimants with existing claimants being moved across to Universal Credit. Alongside the change to Universal Credit, an overall cap has been introduced to limit the maximum amount that can be claimed in respect of certain benefits. Both of these are important changes for advisers to be aware of. H1 Universal Credit Universal Credit is a new, integrated benefit which replaces the following benefits: Income Support; income-based JSA; income-related ESA; Housing Benefit; Child Tax Credit; and Working Tax Credit. It is means-tested, tax free and paid monthly into a bank or building society account. Universal Credit is claimed online and will be administered through the DWP, as will the Housing Benefit component previously administered by local authorities, and the Child Tax Credit and Working Tax Credit elements previously administered by HMRC. Transitional provisions will ensure there are no cash losers as a direct result of the introduction of Universal Credit. Universal Credit comprises a standard allowance, which for 2024/25 is £393.45 a month for a single adult aged over 25, and potentially five other elements based on the claimant’s personal circumstances.  3/14 R05/July 2024 Financial protection These five elements are: child/disabled child addition; childcare; carer; limited capability for work; and housing. Refer to Chapter 3 See Benefit cap on page 3/14 The benefit cap applies to Universal Credit. Most claimants on low incomes will still be paid Universal Credit when they first start a new job or increase any part-time hours they may be working. A link to HMRC’s pay as you earn (PAYE) system will automatically pass information about their earnings to their Universal Credit account. Out-of-work claimants have to accept a claimant commitment, which sets out what they have agreed to do to prepare for and look for work as drawn up during a conversation with a work coach at their local job centre. Claimants who are in work will also have to accept a claimant commitment. On the Web For more information on Universal Credit and claimant commitments, see: bit.ly/2tpzXJ7. Refer to See State Pension Credit on page 3/17 The introduction of Universal Credit also affects Pension Credit following the introduction of the new State Pension. H1A Roll-out of Universal Credit The Government originally planned for Universal Credit to be launched nationally in October 2013, following an initial pilot from April 2013. The planned launch was hit with a number of problems and, as a result, roll-out has been much slower and on a regional basis, only completing for new claimants in late 2018. The Government has now begun the long process of moving claimants from the legacy benefits to Universal Credit. The movement of all legacy claimants will take until late 2026. Given that they continue to apply to millions of people, it remains important for advisers to understand these legacy benefits. On the Web For further information in respect of this benefit, see: www.gov.uk/universal-credit-toolkit- for-partner-organisations. H2 Benefit cap A benefit cap was first introduced in April 2013 for those aged between 16 and 64. This imposes a maximum amount of benefit entitlement for a household – defined as an individual, their partner and any dependent children who live with them. It applies to the total income from Universal Credit, plus the main out-of-work benefits, plus Housing Benefit, Child Benefit and Child Tax Credit. Initially, the cap is applied by local authorities making a deduction from Housing Benefit. Table 3.1 shows the main benefits the cap will take into account. Chapter 3 State benefits 3/15 Table 3.1: Benefits collected under the benefits cap Bereavement Allowance Child Benefit Child Tax Credit Employment and Support Allowance, except where awarded the support component Housing Benefit Incapacity Benefit Income Support Jobseeker’s Allowance Maternity Allowance Severe Disablement Allowance Chapter 3 Universal Credit (unless claimant is assessed as not fit Widowed Parent’s Allowance (or pre-2001 widow’s for work) pension) The benefits cap does not apply to households that qualify for WTC or certain benefits. These benefits are shown in Table 3.2. Table 3.2: Benefits excluded from the benefit cap Armed forces compensation scheme benefits Armed Forces Independence Payment Attendance Allowance Carer’s Allowance Disability Living Allowance Employment and Support Allowance, if paid with the support component Industrial Injuries Benefit Personal Independence Payment Universal Credit, for limited capability for work and War Pension Payments work-related activity War Widow’s or War Widower’s Pension There is a grace period of up to 39 weeks before the cap applies to claimants who have been in employment for 52 weeks or more when they claim the benefit. H2A The benefit cap level The current rates for the benefit cap (2024/25) are: Central London £486.98 a week (£25,323 a year) for couples or single people with children; and £326.29 a week (£16,967 a year) for single people with no children. Elsewhere £423.46 a week (£22,020 a year) for couples or single people with children; and £283.71 a week (£14,753 a year) for single people with no children. On the Web For further information, see: www.gov.uk/benefit-cap. I State pensions The State pension underwent significant change in April 2016, with the implementation of the new State Pension, which replaced the legacy system of Basic State Pension and additional State pensions for new claimants. While it is important to be aware of the legacy schemes applicable to those reaching SPA before 6 April 2016, this text is mainly focused on the new scheme given that we are talking about benefits in the context of protection and clients’ future provision. I1 The new State Pension Refer to See Legacy schemes on page 3/17  3/16 R05/July 2024 Financial protection The new State Pension is designed to provide a subsistence level of income for anyone reaching SPA with an adequate NIC history. It replaced the legacy system of Basic State Pension and Additional State Pension for anyone reaching SPA on or after 6 April 2016. Anyone who had built up an entitlement greater than the amount of the full, new State Pension under the legacy schemes will be entitled to a protected payment on top of the new scheme. This is a measure designed to ensure that nobody is worse off under the new arrangements. Whether individuals will receive the full amount of the new State Pension depends on their NIC record. To benefit from a full pension, a total of 35 years’ NIC contributions must either Chapter 3 be paid or deemed to be paid by virtue of NIC credits. To benefit from any pension, at least ten years’ worth of contributions or deemed contributions will be required. The necessary NICs can be accumulated in different ways. The most common way is from the payment of NICs: – Class 1 (for employees); – Class 4 and voluntary class 2 (for the self-employed). With effect from 6 April 2024, the self-employed only need to pay class 4, but where they have insufficient earnings to require the payment of class 4, it is possible to elect to pay voluntary class 2 in order to build up entitlement; or – Class 3 (voluntary contributions for individuals who want to build up entitlement, but do not pay either Class 1, 2 or 4 NICs); and – Class 3A. These were available for a limited period until April 2017 for those who reached SPA before April 2016 and who wanted to increase their State Pension entitlement. NI credits are granted to those who do not pay NICs because they have been in receipt of a range of qualifying benefits (though they are also granted in some other circumstances). These credits will be treated as if they actually were NICs. Entitlement to the new State Pension is based on an individual’s own NIC record. Under the legacy scheme, it was possible to receive a reduced pension based on the NIC record of a partner. The benefit is taxable, not means-tested and unaffected by the receipt of other social security benefits. The weekly level of new State Pension is £221.20 in 2024/25, in contrast to the standard Basic State Pension paid to legacy pensioners, which stands at £169.50. Anyone who had been ‘contracted out’ of one of the legacy Additional State Pensions before 6 April 2016 will have the level of their new State Pension proportionately reduced. I2 State Pension age The SPA was equalised at 65 in November 2018, having previously been set at 60 for women and 65 for men. The SPA for both men and women has begun to rise, initially to 66 in October 2020. It will rise further under the terms of the Pensions Act 2014, from 66 to 67 between 2026 and 2028. Once this process is complete, reviews will take place every five years and will link SPA to longevity. Be aware In 2023, a government review confirmed the increase to 67 will take place as planned. The further increase to 68, currently scheduled to take place between 2044 and 2046 may well be brought forward, but as yet this has not been decided. The conclusion of the 2023 review was that a further review should take place in the first two years of the next parliament, with 'all options' that meet the requirement to give ten years notice due to be within the scope of the review. On the Web Source: www.gov.uk/government/publications/state-pension-age-review-2023- government-report/state-pension-age-review-2023#executive-summary Chapter 3 State benefits 3/17 On the Web To check your own State Pension age, visit: www.gov.uk/state-pension-age. I3 Legacy schemes Before the introduction of the new State Pension scheme, the State Pension operated on a number of levels. In addition to benefits from the Basic State Pension, employees (specifically not the self-employed) may have been entitled to benefits from the State Earnings Related Pension Scheme (SERPS) or its later replacement, the State Second Chapter 3 Pension (S2P). These were ‘top-up’ State Pension schemes into which employees liable to Class 1 NICs made contributions and received (taxable) benefits from the SPA. Under both SERPS and S2P, it was possible for individuals to be contracted out of the State top-up scheme, either personally or through an occupational pension scheme. Where they were contracted out, the individual did not build up entitlement to SERPS or S2P (although they retained entitlement to the Basic State Pension). Instead, they either benefited from a reduced rate of NI (in the case of occupational pension scheme members) or a rebate on their NI that was paid into their personal arrangement. Anyone reaching SPA will now receive a new State Pension that will be calculated to include an element based on any previous S2P or SERPS entitlement, known as a ‘protected payment’. They will also receive a potential reduction for any time spent ‘contracted out’. It is not possible to contract out of any element of the new State Pension. I4 State Pension Credit State Pension Credit is paid to pensioners and the amount depends on age, income and savings. It has two components, although the savings credit element is available only to those who turned 65 years old before 6 April 2016. Guarantee Credit The Guarantee Credit aims to provide a minimum level of income for those over a certain age. This qualifying age for State Pension Credit is set in line with the SPA and will rise again as SPA is increased. The amount for 2024/25 is £218.15 for a single person (marginally below the rate of the full new State Pension) or £332.95 for a couple. Additional top-up elements may be paid where the claimant is disabled, has caring responsibilities, or needs help with certain housing costs, including mortgage interest payments. Savings Credit The Savings Credit is a legacy benefit, paid to those who turned 65 years old before 6 April 2016. Savings Credit is given (up to the guarantee credit ceiling) at 60p per £1 of income above £189.80 for a single person and £301.22 for a couple. It is then withdrawn at 40p per £1 of income thereafter. The maximum savings credit level for 2024/25 is £17.01 a week for a single claimant and £19.04 a week for a couple. A new claimant may receive the Guarantee Credit only, while – depending on their income position – a claimant from pre-6 April 2016 may be receiving both elements or the Savings Credit only. Be aware When one of a couple is below the qualifying age for State Pension Credit but their partner is not, new claims will be for Universal Credit. This will not apply to existing claims for State Pension Credit. Question 3.6 Is the new State Pension contributory?  3/18 R05/July 2024 Financial protection I5 State dependant’s pensions The Bereavement Support Payment and its predecessors, the Bereavement Allowance and Widowed Parent’s Allowance could be considered as dependants’ pensions, though, in the former case, only short-term. Outside of these benefits, whether a claimant qualifies for any death benefits in respect of the State pension scheme depends on the date on which the deceased had reached SPA. I5A State Pension age prior to 6 April 2016 Where an individual reached SPA prior to 6 April 2016, it may be possible for their Chapter 3 surviving spouse/civil partner to claim part of the individual’s State pension benefits on the individual’s death. Under the Basic State Pension, the survivor can apply for the deceased’s NI record to be used instead of their own. Where the survivor does not have sufficient contributions to qualify for a full entitlement in their own right, this can top up their entitlement if the deceased had a more complete record. It may also be possible for a surviving spouse or civil partner to claim part of the deceased’s Additional State Pension. The rules around how much they may receive are complex and outside the scope of this text. On the Web Further information about claiming a deceased spouse or civil partner’s Additional State Pension can be found at: www.gov.uk/additional-state-pension. I5B State Pension age post 6 April 2016 There are no specific bereavement benefits paid under the new State Pension because it is an ‘individual’ scheme. Given the recent introduction of the scheme, there are some complex transitional provisions that apply: Where one member of the couple reached SPA prior to 6 April 2016 and one post-6 April 2016, the survivor may still be able to use the NI record of the deceased and may also be able to inherit Additional State Pension. Where both partners reached SPA after 6 April 2016, the only entitlement that may be passed on is 50% of any protected payment that exists. J Considerations and impact on financial planning In this chapter, we have looked at a number of the more important social security benefits and, where appropriate, discussed the way in which their existence might either highlight or reduce the need for additional insurance. It is clear that, for most people, benefits will not be sufficient to help maintain the standard of living they enjoyed while receiving earned income. Thus, the need for additional savings, life assurance and sickness insurance should be obvious. However, as many people are not aware of the modest level of these social security benefits, the financial adviser needs to bring this to the attention of their clients. We have also identified categories of social security benefit which are means-tested on either income or capital. These should not be overlooked by financial advisers preparing recommendations for clients for the provision of either income or capital benefits on the occurrence of a certain event (for example, long-term illness, retirement or death). The provision of these benefits may well reduce an individual’s entitlement to means-tested benefits at that time, and this consideration should be borne in mind in the recommendation.