RP Case Study: Changes to pension guarantee credit

From May, a change in the rules affecting pension guarantee credit mean both people in a couple must be over state pension age in order to receive the benefit. In this week’s case study, Bob Champion looks at how a couple unprepared for the change might be affected, and must change their retirement plans as a result.

From 15 May 2019, the rules affecting pension guarantee credit (PGC) are changing. In its simplest form PGC will, from 6 April 2019, provide a minimum income of £167.25 a week to a single person over state pension age and £255.25, for a couple. PGC also opens the door to several other state benefits.

One of the problems with PGC is that it is estimated nearly 40% of those who are entitled to it, do not claim it. Currently for a couple to receive PGC one has to be over state pension age. The new rules mean that from 15 May, both will – in most situations – have to be over state pension age. A couple with one below state pension age will receive working age benefits instead of retirement age benefits. There will be a large difference in what they receive.

Case study

The change may appear small. But let us look at an example of a hypothetical couple. Geoff and Tricia. Geoff reaches state pension age on 6 July 2019 aged 65 and four months. Tricia is just over age 62 so will not reach her state pension age until she is 66. Geoff works for a small builder’s merchant and while fit for his age, does struggle with the physicality of his job and is looking forward to his retirement.

Tricia suffers from fibromyalgia that drains her energy, so much that she gave up work as a carer in a nursing home 18 months ago. Since then they have managed solely on Geoff’s income and the running down of the small amount of savings they have. They have paid off their mortgage and their children have left home.

For most of her working life, Tricia expected to receive her state pension from her 60th birthday. Geoff has a small pension fund built up over the last few years following the introduction of auto-enrolment. Other than that, he is entirely dependent upon his state pension.

Some people are in the wrong place at the wrong time. Tricia has always worked and paid national insurance since she left school at 16. To ensure the mortgage was paid off as quickly as possible after the birth of each of her three children with the help of her mother, who lives nearby, she quickly returned to work.

If it were not for the changes to state pension age, she would have received a full state pension, in her own right, from age 60. When Geoff received his state pension, although the household would suffer a reduction in income, their savings would still be intact. They would be in receipt of two state pensions that would have taken them both over the minimum for pension credit.

The way the changes to the women’s state pension age and pension credit work for this couple means that they will not receive PGC for a couple from when Geoff retires. They will now have only Geoff’s state pension to live off.

Because the shortfall in income from the pension credit amount paid to a couple is so much (possibly around £90 a week) you would expect that Tricia should be able to claim some working age benefits. This is unlikely – the base amount for a couple on universal credit is £498.89 a month from which Geoff’s pension would be deducted on a pound for pound basis, so Geoff’s state pension is going to be more than that.

It is unlikely that Tricia would qualify for any of the additional universal credit components that would entitle Geoff and Tricia to a universal credit payment that would exceed Geoff’s state pension. On the face of it, for nearly four years they will have to live off a single person’s state pension. They will then, from Tricia’s 66th birthday, see that income nearly double. The next four years are going to create problems for them.

So, what are their choices? Because of her health it is unlikely that Tricia will be able to find work. Geoff may be able to find some less strenuous work but at his age and the local job market this is unlikely. The small auto-enrolment pension is not going to last long.

Other than that, the only asset they have to call upon is their home. As it is modest, realising money through downsizing is not going to generate much after moving expenses have been deducted. Therefore, the only course of action appears to be equity release to draw down the equivalent of four years’ state pension to tide them over until Tricia’s State pension comes into payment.

There are two other observations that should arise from this article. Firstly, if Geoff was a little older and reached state pension age before 15 May 2019, the above difficulties do not need arise. However, to avoid them, the claim for PGC must be made before 15 May.

Secondly, the 40% who are entitled to PGC but not claiming it must be struggling and possibly getting into financial difficulties. It is in all our interests to raise awareness and help them claim what is rightfully theirs.

Bob Champion is chairman of the Later Life Academy (LLA)