Understanding state pension rights and inheritance

The topic goes beyond the basics—there are numerous layers to uncover

For many, the intricacies of the state pension remain very confusing, particularly regarding what happens after someone passes away. While many know that the state pension does not automatically cease when someone dies, understanding your rights or the rights of a widowed spouse or civil partner can be a complex process.

The topic goes beyond the basics—there are numerous layers to uncover. From the historic Old Age Pension, now known as the Basic State Pension, to the more recent structures like the New State Pension, the State Earnings Related Pension Scheme (SERPS), and protected rights, getting clarity often requires digging deep into their rules and options.

Delving into SERPS and SSP

SERPS was introduced in 1978 as a means for workers to boost their state pension contributions by paying increased National Insurance (NI). It allowed individuals to build an ‘additional state pension’ tied directly to their earnings level over their careers. However, SERPS was replaced in 2002 by the Second State Pension (SSP or S2P), which continued until 2016 to offer workers this additional option.

During the SERPS era, many employees were given the opportunity to ‘contract out.’ This meant they could redirect part of their NI payments into alternative private pension plans. This system, known as a ‘protected rights pension,’ aimed to provide individuals an opportunity to secure potentially greater retirement income through long-term investment.

Role of employers and employee choices

Some organisations offered their workers the option to opt out of SERPS voluntarily, while others automatically contracted employees out—especially in cases involving defined benefit pensions. Guidance from scheme advisers often dictated whether an employer chose to contract employees in and out over various years.

For individuals employed between 1978 and 2016, understanding whether they—or their late spouse or civil partner—were contracted out can be pivotal in determining entitlement to protected rights, SERPS, or SSP-related benefits. Even tracing these entitlements can be daunting with decades of changes and evolving rules.

How entitlements vary before and after 2016

The rules surrounding inheritance rights shifted significantly depending on when you or your spouse retired. The inheritance rules were notably more favourable for those who reached the state pension age on or before 5 April 2016 than those retiring after this date, underscoring the system’s complexity.

If your spouse or registered civil partner reached state pension age before 6 April 2016, you may be eligible to inherit part of their state pension. Their entitlement would be linked to their NI contributions, and contacting the Pension Service directly is necessary to confirm what you might be able to claim. Notably, if they voluntarily topped up their pension between 12 October 2015 and 5 April 2017, you might inherit a significant portion—or even all—of these additional contributions.

Impact of deferring and protected payments

Another area to consider is deferred pensions. If your spouse or registered civil partner decided to delay claiming their state pension, you may inherit part or all of their additional entitlements. However, this is subject to conditions. For example, deferred periods of less than 12 months do not qualify for a lump sum, yet additional pension payments can still be claimed.

For cases where death occurred on or after 6 April 2016, inheritance rights depend heavily on the marriage or civil partnership’s timeline. Specifically, marriages or civil unions commencing before 6th April 2016 offer the chance to inherit up to half of your partner’s protected payment from contracting out of SERPS or SSP benefits.

Divorce, dissolution, and pension-sharing orders

If the relationship ended in divorce or a dissolution of a registered civil partnership, rights to a partner’s State Pension become more nuanced. You might receive additional pension payments only if pension-sharing was included in a court settlement. Otherwise, claims are typically off the table. Depending on the court ruling, these orders could increase your own state pension entitlement or require sharing any protected payments with your former partner.

It is critical to stay informed

Given state pension inheritance’s complexities, staying informed is critical. Rules surrounding SERPS, SSP, and protected rights have far-reaching implications for your financial future or that of a surviving partner. Identifying entitlement requires closely examining NI records and State Pension rules, with professional guidance often proving invaluable.

Need help understanding state pension?

Please contact us if you or someone you know needs help understanding state pension inheritance rights and entitlements. We’ll ensure the right steps are taken to safeguard future financial security.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.