FIND GOOD FINANCIAL ADVICE

How do I find a good financial adviser? It's a question I am often asked. And there is no easy answer. Especially if you do not have a lot of money.  

My first question is do you need financial advice? Unless you have a big lump-sum (tens of thousands of pounds or more) or a lot of surplus income to invest (hundreds of pounds a month) you probably don't need financial advice and probably will not want to pay the fees good advisers charge. See free financial advice below for other services that can help you.  

But if you do want regulated financial advice then here is my guide. Many people first want or need advice when they think about exercising their new pension freedoms. Some with a fund worth than £30,000 or more which comes with a guarantee have to take regulated financial advice before they can transfer their money out either to another pension or, ultimately, to cash.

I have three filters to sort the best advisers from the others. 

Filter One - Independent

Only ever use an Independent Financial Adviser. This term is now regulated and policed under EU rules called MIFID II which began on 3 January 2018. Now that the transition period is over and the UK has left the ambit of the EU these rules have become part of UK law and the Financial Conduct Authority polices them.

Under these rules there are two main sorts of financial advisers.

The sort you want is called 'independent'. That can mean one of two things.

1. They give advice on all financial matters and looks across the whole of the market and give that advice on any financial topic where they might recommend a product.

2. They give advice on a specific type of product - such as annuities or pensions - and not on other types of product. But they must still look across the whole of the market relating to that product. This may be called 'focused independent' or may just be called 'independent'.

Any adviser who is not independent does not look at the whole of the market and may be tied to one or more firms and can only recommend products from those firms. In the UK these advisers are called 'restricted' though hardly any of them used that term. Never ever use an adviser who is restricted by products. If you ask 'do you offer independent financial advice' and the answer is anything but a clear 'yes' then reject them. Many work for a bank or insurance company and of course only recommend you buy their products. That is just sales masquerading as advice.

A lot of advisers will be rejected by Filter One. The only way through it is to become independent.

Filter Two - Planners

Only ever use an IFA who is a chartered or certified financial planner. The very best qualified financial advisers are chartered (or certified) financial planners. This brings you down to the best qualified 6000 or so of the 33,000 regulated financial advisers. They are beyond what is called QCF Level 6. So they have put a lot of effort into being the good guys and the chances of a bad guy (or gal) remaining in there is small. Some firms are chartered which means that at least some of their advisers are chartered themselves and the rest are probably working towards it.

Lots of good advisers will be rejected by Filter Two. Sorry. Get the qualifications.

Filter Three - Payment

My general position is only use a financial planner who you can pay in pounds. Do not choose one who wants to charge you a percentage of your money. You earned, made, or inherited it. Charging a percentage is like taxing your wealth. Even HMRC is not entitled to do that. 

Percentage fees are a hangover from the days of commission when advisers lived on a percentage of your money they were paid year after year. If you cannot afford the fee in pounds then you probably do not need or cannot afford financial advice. 

However, in some very limited circumstances a small percentage charge - say 0.5% or so - can be better value than paying in pounds. But always make sure that:

• you know each year how much has been taken from you so you can see if it is value for money.
• you review the service you get every year and if it is poor, find another adviser.

Ideally you should also pay upfront from your non-invested resources rather than out of your invested money. One drawback of that approach is that a fee taken out of your pension fund comes from money which has already had income tax relief. So ultimately that fee costs you less than if you paid it out of your taxed income. It is all part of the massive taxpayer subsidies for the financial services industry (relief from VAT for finance and insurance costs £11 billion a year). That was originally an EU law but is very unlikely to change once we have finally left the EU in 2021. If you must, then pay in tax-subsidised pounds from your pension fund. But ideally - and with all other investments - pay in pounds out of your non-invested resources. That way you see the money you are paying and can ask yourself – is it worth it? And unless it is good value and you know what it is and what you get for it never pay a wealth tax to the adviser from your fund. 

Contingent fees
One iniquitous method of charging grew up around pension transfers. If you have a good company pension that promises you a pension related to your salary - called Final Salary or sometimes Career Average schemes (they are branded Defined Benefit or DB schemes by the industry) you may be tempted to transfer it to a pension pot scheme - a money purchase or Defined Contribution (DC) scheme.

Transferring out of a DB scheme into a DC scheme can seem very tempting because you will get a massive amount of money to move away from the guaranteed DB pension. And then if you choose to do so you can cash some or all of that pension in. It is almost always a bad idea. In the past some financial advisers who would deal with this for you (you have to get advice if your pension is worth a transfer value of £30,000 or more) charged on a 'contingent' basis. That meant you only paid them if you took their advice and transfered your fund. Such fees created a conflict of interest between you and the adviser who was only paid if you transfered. The FCA finally saw sense and banned contingent fees from 1 October 2020. 

The difficulties of advising people about pension transfers and the cost of insurance mean that relatively few advisers will handle this business. Esepcially if you do not have a very valuable pension. 

Next steps
These three filters will take you a long way towards finding good, safe, but often expensive, financial advice. There may be adequate or even good, safe, and perhaps cheaper advisers which have been filtered out. They can get themselves through my three filters by becoming independent, getting financial planning qualifications, and changing the way they charge.

I must also add that there are a small number of well qualified independent financial advisers who have given dreadful advice (especially about pension transfers), have gone out of business, or have even turned out to be crooks. So these three filters are not a guarantee but they are a good start.

Website research

You can apply your three filters using online directories of financial advisers.

1. Adviser Book is the newest directory. Unlike the others no-one pays to be included. It has the complete list of more than 12,000 FCA regulated adviser firms on it but it does not yet list individual advisers separately. It clearly states who is verified as independent thouhg most of them are still unverified. You can filter by qualifications and specialisms. You can also filter by independent and how fees are charged.

2. Unbiased was the first real attempt at a comprehensive database. It says it lists more than 18,000 financial advisers who are mainly independent but some are restricted. Advisers get a basic listing free but they must pay a subscription to be directly contactable through the website. You will see a list of the 'top 20' near your postcode which unbiased says is based on how near they are to you.

You can use the site to apply my filters. You can also make other choices such as specialisms or qualifications. You can even pick a male or a female adviser.

3. Vouched For uses its algorithms to provide a list of advisers for you. They are ordered to take account of how local they are to you, reviews by customers, and ratings. Advisers cannot pay for a better position in the list. The site checks qualifications by asking the senior manager who is responbile for them and checks that periodically. It demands images of certificate for qualifcations.

You can filter by speciality, by independent or not, and by qualification. And each entry shows clearly if the adviser is independent or restricted - always reject the latter of course. It will also show the minimum amount of money you need for them to take you on as a client. 

Vouched For lists about 8000 financial advisers who choose to pay the fees to be included and of those 3000 are full vouched for - you can only click through to the adviser website for those. 

Other listings are available but they are much less useful. The Personal Finance Society lists all the advisers who have its qualifications and are Chartered Financial Planners, or are on the way to becoming Chartered, or work for a firm which is Chartered. That is a useful check. But it does not indicate if they are independent.

Next steps

After using these sites and checking for independence, qualifications, and how they charge, you should then pick two or three you fancy.

I would only use an IFA who has a website where you can find out more. Ignore the slick sales patter which usually reads as though it is generated by a PR machine. You'll find similar meaningless platitudes on most of them.

Most adviser websites do not tell you how much they charge - I would tend to pick only those that do. Certainly make that your first question when you meet them. If the answer is anythnig but clea that is a warning flag. Also ask what it will be in pounds (if they haven't told you) and then ask what you get for that fee.

Most advisers will give you one free session. Go prepared with details and information about yourself. Try two or three and see which you prefer. Do not be embarrassed to say 'no' to them.

If you pick an adviser but later regret it you can leave by just writing them a letter telling them that they are no longer your adviser. Ask them to return any documents and destroy all your data. If you feel you have been badly advised or locked into investments you did not want, then complain and pursue the complaint to the Financial Ombudsman Service.

Free financial advice 

If you want financial advice outside the regulated professionals, then try the free, Government approved Money Helper site. That is the new name for what used to be called the Money Advice Serivce. Its website is very good on a whole range of money issues, some of which many financial advisers will know little or nothing about. Or you may want to consider joining Which? and subscribing to its Which? Money Helpline. That will cost you £10.75 a month.

If you have pension questions then you can still contact the Pensions Advisory Service which has a helpful helpline on 0300 123 1047. The service is now part of Money Helper. It is free and approved by the Government.

Specific advice about the pension freedoms which began in April 2015 can be found at Pension Wise. If you are over 50 you can call 0300 330 1001 to book an appointment for one-to-one telephone advice, or a face-to-face interview at a nearby Citizen's Advice office. Again, Pension Wise is now part of  Money Helper.

Footnote

Only the term 'independent financial advice' is regulated. Anyone can call themselves a 'financial adviser', an 'investment manager', or a 'property specialist'. And they do. All those terms are meaningless. Some call themselves International Financial Advisers which they abbreviate to IFA trying to give the impression that they are Independent Financial Advisers. They are not and are probably not even regulated. All these people are allowed to operate unregulated as long as they only sell unregulated investments in things like whisky, property, or art. Your money is completely at risk. 

If an adviser does not use the word 'independent' or does not say simply say 'yes' when you ask if they are independent, then they are not. Avoid them. Always ask for a Financial Conduct Authority number and check it out on the Financial Services Register. Not all individual regulated advisers are on it. But all regulated firms are so ask the adviser about their firm. Then use the contact details on the FSA Register to check with that firm is the person who claims to work for them does so. 

Sadly - and madly - the register does not say if the adviser is independent or restricted. Sadly - and madly - again, changes to the Register mean that it is not as comprehensive as it was. But never trust someone who is not on it. And be cautious even about those who are.

If you are ever cold called or receive a text or email from an adviser you have not found and researched just say 'no'. No-one ever lost money by doing that. Many have lost money by not doing that.

Paul Lewis

23 October 2023

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TARGET 203 - BOOST YOUR NEW STATE PENSION

UPDATED for the 2023/24 tax year. All rates are those paid from 10 April 2023.

More than a million people who reach state pension age in the years from 6 April 2016 will not get the full amount of the new ‘flat-rate’ state pension - currently £203.85 from 10 April 2023.

But many of them could boost their pension towards or up to the full flat rate amount.

This guide is for men born 6 April 1953 or later and women born 6 October 1953 or later who paid into a good pension at work or, in some cases, into a personal pension.

It is complicated - don't blame me I didn't invent the rules! But please persist, as it could make you better off for the whole of your retirement.  

There are other groups who may not get the full new state pension because they have paid less than 35 years of National Insurance contributions. They may be able to boost their state pension by paying extra contributions now. This piece does not cover that issue. Try the links at the end.

NEW STATE PENSION

The new state pension was supposed to be simple. A flat-rate amount for everyone who had at least 35 years of National Insurance contributions. This year 2023/24 that amount is £203.85 week (£10,600.20 a year) and is taxable. However, there are around one and a half million people who will reach pension age in the years before 2027 who will get less than that even if they have 35 years or more National Insurance contributions.

That is because an amount is deducted from the new state pension for every year they paid into a good pension at work. I call it a contracted out deduction because they were ‘contracted out’ of part of the state pension called SERPS or State Second Pension (S2P). They paid lower National Insurance contributions and instead of that additional state pension they get a pension from their job which was supposed to replace it. The Government prefers to call it 'Contracted Out Pension Equivalent' or COPE. It is that COPE amount that is deducted from your new state pension.

This group includes most people who worked in the public sector, such as

• nurses, doctors, and others in the NHS
• teachers in schools and universities
• police officers and fire brigade staff
• civil servants
• local government workers
• armed forces
• Post Office workers

It also includes many people who worked for one of the privatised industries such as British Airways, British Rail, British Steel, and Royal Mail.

Another large group affected are people who worked for a private sector employer who paid into a good scheme at work that promised them a pension related to their salary. They used to be called ‘final salary’ schemes and nowadays are called Defined Benefit or DB schemes. In the past many large firms ran such schemes. There are still more than 5000 of them and if you paid into one at any time from 1978 your new state pension will be reduced.

Also included are some people who paid into a personal pension and who were persuaded to contract out of part of the state scheme – at the time it was normally called ‘contracting out of SERPS’.

For all these people their new state pension will be reduced for the years they paid into a contracted out pension scheme. That deduction applies even if they have paid the 35 years which is needed to get a full pension – the deduction is made after the full pension is worked out. It can also apply even if they were contracted out for a short period and paid in 35 years or more when they were not contracted out. These deductions can be very large but normally can never leave you with less than £156.20 a week of the old or 'basic' state pension.

Please do not ask me why that is fair! It may not be fair, but it is the law. The good news is that you can reduce that deduction and, depending on your age and the amount deducted, you may be able to boost your pension up to the full flat-rate £203.85.

THE DEDUCTION

If your new state pension has an amount deducted from it because you spent some time paying into a good pension scheme at work then you can reduce that deduction or even wipe it out. It will help even if you already have 35 years of National Insurance contributions or more.

If your new state pension is reduced because you paid into a good pension scheme at work then every year of National Insurance contributions you pay from 2016/17 to the year before the tax year in which you reach state pension age - now 66 for everyone - will mean that deduction is less.

If you work and earn more than £123 a week you will get contributions credited or paid to your account (you start actually paying for them when you earn above £242; under that they are credited). If you get child benefit for a child who is less than 12 years old then you will also get a credit for each week. If you get universal credit, jobseeker’s allowance, employment and support allowance, or working tax credit then you will get a credit for each week you get that benefit. You can also get credits if you are a carer in some circumstances. Check here for more details of who can get credits. Some are given automatically, others have to be claimed.

Men can get credits for years between women’s state pension age and 65. They get a credit for the tax year in which they reach women's state pension age (unless they also reach 65 in that tax year) and any subsequent tax year before the tax year they reach 65. So these man credits are only available to men born before 6 October 1953. See footnote.

If you are self-employed then in 2023/24 you must pay what are called Class 2 National Insurance contributions if your profits are £12,570 or more. They are called Class 2 and are £3.45 a week (£179.40 a year). If your profits are between £6725 and £12,750 you will be given a credit. If your profits are up to £6724 you can pay these contributions voluntarily - but only for years in which the were genuinely self-employed. In previous years there were no credits paid and the threshold for paying was just below £6725 a year. 

If you will not pay National Insurance contributions at work or as self-employed or get credits for them then you can pay voluntary contributions, called ‘Class 3’. They will cost you £17.45 a week (£907.40 for a year). For each extra year of contributions your pension will be boosted by £5.82 a week (£302.86 a year) so the payback is rapid – three years for non-taxpayers; less than four if you pay basic rate tax; five for higher rate taxpayers, and less than five and a half for top rate 45% taxpayers. Contributions for earlier years are less: 2022/23 - £824.20; 2021/22 - £800.80; making them even better value for money. If you pay in this year 2023/24 you can only pay the lower rates for two previous tax years. Contributions for 2020/21 and earlier will be at today's rate of £907.40. [For reference earlier rates were 2020/21 - £795.60, 2019/20 - £780.00; 2018/19 - £772, 2017/18 - £740, and 2016/17 - £733.20 but you can no longer pay at these rates.]

The new state pension was increased to £203.85 a week from 10 April 2023 rising according to the triple lock of earnings, prices, or 2.5%. Prices rose the most so the pension rose by inflation measured by the CPI (the previous September) which was 10.1% 

If you have paid some contributions at work or as self-employed during the tax year but you are short of a full year you can pay individual weeks through Class 3 (or Class 2) to make your record up to a full year.

You can only pay Class 3 contributions for the years before the tax year in which you reach state pension age. That limits the number of years you can pay to boost your pension. The table show which years you can pay Class 3 contributions to set against the contracted out deduction and the maximum boost that should give to your pension. Your pension cannot be boosted to more than £203.85 a week and it will not ever be reduced to less than £156.20 so the maximum boost is £47.65. Paying the ninth year may not be worth it for £1 a week boost.

BOOSTING A NEW STATE PENSION THAT IS SUBJECT TO A CONTRACTED OUT PENSION EQUIVALENT (COPE) DEDUCTION

Reach State Pension Age in	Men born		Women born		Years you can pay	Maximum pension boost (2023/24 rates)
2016/17 or 2017/18	6 April 1951	5 April 1953	6 April 1953	5 Oct 1953	0	£0.00
2018/19	6 April 1953	5 Jan 1954	6 Oct 1953	5 Jan 1954	1	£5.82
	Men and women born
2019/20	from 6 January 1954		to 5 July 1954		2	£11.65
2020/21	from 6 July 1954		to 5 April 1955		3	£17.47
2021/22	from 6 April 1955		to 5 April 1956		4	£23.30
2022/23	from 6 April 1956		to 5 April 1957		5	£29.12
2023/24	from 6 April 1957		to 5 April 1958		6	£34.95
2024/25	from 6 April 1958		to 5 April 1959		7	£40.77
2025/26	from 6 April 1959		to 5 April 1960		8	£46.59
2026/27	From 6 April 1960		To 5 April 1961		9	£47.65 (max)

NEXT STEPS

You can pay voluntary Class 3 contributions in the tax year they are due or up to six tax years after that. So you can still pay for the 2017/18 tax year until the end of this tax year, 2023/24. So you should act quite soon if you want to payfor that tax year. You cannot pay them in advance so make a note to pay future years in April. However, the price will almost certainly rise as time passes so it will usually be cheaper to pay them as soon as you can.

If you will reach state pension age in 2023/24 you may want to act soon to see if you can boost your pension by paying National Insurance contributions for the six years 2017/18, 2018/19, 2019/20, 2020/21, 2021/22, 2022/23. That could give you an extra £34.95 a week on your pension.

You can phone the DWP’s Future Pension Centre on 0800 731 0175 and ask for help or advice about paying extra contributions. Have your National Insurance number with you. Ask what your ‘starting amount’ is and ask if there is a deduction for being contracted out. If your starting amount is less than £203.85 and there is a contracted out deduction then you may be able to boost it using the information in this guide. 'Starting amount' is explained in the notes below. If you have a deduction for a pension which you cannot trace use the Government's free Pension Tracing Service.

In the past, many people have contacted the DWP and been told they cannot boost their pension because they already have 35 years or more of contributions. That is incorrect. Some officials seem to be confusing this scheme with one to fill gaps in your contribution record. Others have been told that they need more than 35 years to get a full pension. That can be true in the circumstances in this blogpost, but it is a confusing way to put it. 

You may get more sense from the free and excellent Money Helper website or call on 0800 011 3797. Beware of similar sounding commercial organisations.

You can check your starting amount at this Government website. You will have to go through security procedures which can be a pain. Make sure it includes your 2015/16 contributions. This website may let you see how you can boost your pension by paying extra National Insurance contributions. 

NOTES

1. All the rates in this guide are correct in 2023/24. 

2. If your income is low then you may get extra money from pension credit or help with your council tax or rent (rent or rates in Northern Ireland). If you buy Class 3 contributions to boost your pension those benefits will be reduced but it will almost always still be worthwhile.

3. Your ‘starting amount’ is the calculation of how much state pension you have built up at 6 April 2016 under the old and the new rules. Your starting amount is the one that is bigger. It will take account of National Insurance contributions paid up to 2015/16 and will also make a deduction for years you have been ‘contracted out’ of part of the state pension system called SERPS. If it shows you have fewer than 35 years of National Insurance contributions then sadly iy id now too late to pay more to boost that number towards 35. 

4. SERPS, the State Earnings Related Pension Scheme, was an earnings-related supplement to the basic state pension. People paid into it as part of their National Insurance contributions from April 1978 to April 2016. From April 2002 it was changed and renamed State Second Pension (S2P). It was SERPS and S2P – officially called ‘additional pension’ – which people ‘contracted out’ of if they paid into a good pension at work or in some cases into a personal pension which they chose to ‘contract out’. They paid lower National Insurance contributions. The pension they paid into was supposed to replace the SERPS or S2P but it does not always do so in full. If it shows that you have fewer than 35 years of National Insurance Contributions then you may be able to pay to fill gaps right back to 2006/07 to boost that number towards 35. 

5. Tax years run from 6 April one year to 5 April the next. So 2023/24 runs from 6 April 2023 to 5 April 2024.

6. If you have an old company or personal pension you cannot trace, use the Government's free Pension Tracing Service.

7. Contacted Out Pension Equivalent is the amount deducted from your new state pension to take account of the time you were contracted out of SERPS/S2P. In theory the amount deducted should be paid to you by the pension scheme you paid into as part of being contracted out. But that will not always happen especially if you were contracted out into a personal pension. This government guide to contracting out sort of explains it.

8. Man credits. These man credits - called auto-credits - are only awarded for whole tax years, not individual weeks. Men born 6 April 1952 to 5 April 1953 can get a year of contributions credited for 2016/17. They may also get earlier years credit but they do not help with reducing their contracted out deduction. Men born 6 April 1953 to 5 October 1953 can get a year credited for 2017/18.

Men born 6 October 1953 or later cannot get them.

BOOST YOUR PENSION GUIDES FOR OTHER GROUPS

Men born 6 April 1951 or later and women born 6 April 1953 or later.

·         Filling gaps in your National Insurance record – new state pension 

Men born before 6 April 1951 and women born before 6 April 1953

·        It is now too late for you to fill any gaps in your National Insurance record – old state pension 

·        

There is also a comprehensive guide to what you can do to top up your state pension available as a download from the mutual insurance company Royal London written by former Pensions Minister Steve Webb. It is a little out of date now but is well worth a couple of hours study.

Version: 6.0

5 October 2023
Previously: Target 155, Target 164, Target 169, Target 175, Target 179, Target 185

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DON'T TAKE AWAY WINTER FUEL PAYMENT

UPDATED 3 OCTOBER 2023

Another autumn, another round of people saying means-test the winter fuel payment. Somne even saying do that and use the money saved to save the triple lock.

Let me declare an interest. I am old enough to get the £200 tax-free Winter Fuel Payment (the extra £300 is a cost of living payment last year and this and not technically part of the WFP). And I might add I do not in the slightest need that money. If it disappeared tomorrow it would not leave me freezing in the winter and wondering whether to choose turning up the heating or buying a few groceries. 

So I get it; I do not need it; and the amount is small enough in my personal financial affairs that whether I get it or not is neither here nor there. 

That leaves me uniquely able to say unequivocally that it would be complicated, counterproductive, and wrong to stop Winter Fuel Payment for those over state pension age of 66. Here’s why.

First, complicated. Who would you take it away from? Everyone who admitted they didn’t need it? Everyone called Paul? Everyone who paid higher rate tax? That would be possible but it would create a cliff edge at an income of £50,270 – earn an extra £1 or your pension rises £1 a year and you would lose £200. And it would not save much. The Government estimated some years ago that ending it for households with an income above £35,000 would save just £270 million out of the total cost of more than £2 billion. The administrative cost could be £25 million a year or more.

You would save more by following what one tweeter suggested to me. Go down the income scale and only give these benefits to those poor enough to pay no income tax. Then the cliff edge would move down to £12,570. That would save more but would certainly take it away from many who did need winter fuel payment to keep warm in winter living on less than £241 a week.

Another problem is that these are individual entitlements so the non-taxpaying spouse or civil partner of a higher rate taxpayer would continue to get it. 

The same problem would be found if the payment was taxed as income. Where two pensioners share a household the £200 is split in two - £100 each. So each partner would have to be taxed separately on it. And where one partner earned, say, £1,000,000 a year and paid 45% tax on the payment, their partner may have no taxable income and pay nothing. So a household where many think the payment is not needed would still keep £155 of it. 

There would also be problems where the payment just tipped someone over from being a non-taxpayer to paying tax. How would the right amount be collected if, for example, winter fuel payment pushed an individual £50 above their tax threshold and they owed £10 tax? Solving those problems would be expensive and a back of the envelope calculation suggests the tax take might be less than £200 million a year. 

The next step might be link it to pension credit. But the level of pension credit is less for younger pensioners than it is for older ones. So that would be another divide. And of course an estimated 850,000 pensioners who could get pension credit do not claim it and would not get the Winter Fuel Payment either. Though as they are already living below the pensioner poverty line they certinly need it.

Now, I know your next argument. It is one I have made myself. Surely, you are thinking, surely all that Oxbridge brain power in the civil service can come up with SOME scheme to rid me of these turbulent pensioners? Well, they might. They did come up with a scheme to tax child benefit at up to 100% where a parent has an income over £50,000. That sort of works except a lot of those who should pay the tax did not know about it and are now being pursued for arrears. The others have the bother of filling out a self-assessment form or not claiming child benefit at all which could cause them problems later in life.

So that is the ‘complicated’ bit.

Now ‘counterproductive’. The thing about these universal benefits – ones that you get on grounds of age or condition – is that they go to everyone in those categories. Those who need them do not have to declare their poverty to get them. If they do have to take that step then many simply do not claim. A total of £19bn is unclaimed in varous means-tested benefits by people of all ages (Policy In Practice 2023). As I said an estimated 850,000 pensioners do not claim £1.75 billion in pension credit. Add in housing benefit and council tax support and the figure is a lot higher. 

Paying everyone Winter Fuel Payment is the price we pay as a society so that my neighbour Marjorie, too proud to claim means-tested benefits though she needed them, at least got her winter fuel payment in her last years. If you means-test winter fuel payment then poverty among pensioners would grow as many who needed it failed to claim what they could get. 

And finally ‘wrong’. In a way this is an extension of counterproductive. Some countries call the government departments that run social security or health the Ministry of Solidarity. Because state benefits represent solidarity. Between the sick and the well. Between the jobless and those in work. And, of course, between young and old. There are times and circumstances in life when the state should step in and transfer money from one group to another. Just as the childless pay for schools. The law abiding pay for the police force and the courts. And those without solar panels on their roof pay for those who get cheaper power from them. 

In summary, taking winter fuel payment away from richer older people or from older people deemed not to be poor would save relatively little, cost a lot in administration, increase poverty among the old, and undermine solidarity between the generations. 

This is a revised version of a blog first published in 2012 and 2015 when there was also a debate about whether to means-test free bus passes.

3 October 2023
version 2.0

FILL THAT GAP - if you reach pension age from 6 April 2016

UPDATED 26 March 2023

These rules apply to men born 6 April 1951 or later and women born 6 April 1953 or later. if you are older than that it is too late to fill gaps in your National Insurance record - see different rules for older people. 

You need 35 years of National Insurance contributions to get a full state pension. If you have fewer than 35 years National Insurance contributions you will get a reduced pension. So if you have 21 years you will get 21/35ths or 60% of a full pension. If you have less than ten years you will get no pension.

It may be possible to pay some extra contributions now to fill some or all of that gap. They are called voluntary Class 3 National Insurance contributions. 

Contributions at work

You will have paid National Insurance contributions by being in work and paying full Class 1 contributions. You may not even have noticed as they are just deducted from you pay. If you earned very little then no National Insurance contributions would have been paid. If you earned too little to pay them you would have been credited with them. 

Reduced rate contributions paid by some married women do not count. If you have gaps caused by paying those contributions you cannot fill them. It was a very unfair system but nothing can be done about it now.

If you were self-employed and paid Class 2 contributions they count towards your pension equally with Class 1.

Credits

Some people who did not pay contributions were credited with them. The rules about credited contributions are very complicated. But broadly speaking you may be able to get credits for years you 

• Got child benefit for a child under 16 (that changed to under 12 from 2010)
• Were unemployed and looking for a job. Usually you would be on Jobseeker's Allowance - but you may get credits even if you were not 
• Were on employment and support allowance, or were eligible for it, or got statutory sick pay
• Received working tax credit 
• Cared for someone who was sick or disabled
• Got maternity or paternity benefits 
• Were male and did not work in the few years approaching the age of  65.

Some credits are given automatically; others have to be claimed. The gov.uk website publishes a full list of credits and which have to be claimed. There are also details of how to check your record. It is all ridiculously complicated but can be very worthwhile!

If you find you still have gaps in your National Insurance record and you have less than 35 years contributions you may be able to fill them now. 

Seventeen years back

You can pay contributions back to 2006/07. Each tax year from 2006/07 to 2019/20 will cost you £824.20. Contributions for year 2020/21 will be £795.60 and for 2021/22 will be £800.80. The cost to pay voluntary contributions to fill the past year 2022/23 is £824.20 and for the current year 2023/24 £17.45 a week or £907.40 for the year. However, that higher rate will not be charged for any back contributions paid up to 31 July 2023.

You must buy the extra contributions by 31 July 2023. After that you will only be able to buy them back to 2017/18. You cannot buy contributions for the tax year in which you reach state pension age or any later year. 

Should you pay?

It is complicated to decide if it is worth paying to fill gaps. If you have fewer than 30 years contributions under the old system before 2016/17 it is probably only worth filling old gaps to bring that up to 30. However, in some circumstances it may be worth filling old gaps to bring it up to 35. If you can do so it is always worth filling gaps up to 35 by paying contributions from 2016/17. And it may be worth ensuring you pay contributions under the new system even if you have 35 years contributions and you have spent some time paying into a good company or public sector pension scheme. That is explained in another blogpost.

In exchange for one year's contributions you will get extra pension at 2023/24 rates of £5.82 a week (£302 a year) from the date you pay. So the payback time for the cost of the contributions is less than three years though nearly three and a half if you pay basic rate tax and about four and a half if you pay higher rate tax. The pension you buy should rise by at least 2.5% from April 2024 and after that in line with earnings or possibly prices depending what a future government decides. 

More information

Paying Class 3 voluntary national insurance contributions

Extending the deadline for paying back contributions

26 March 2023
vs. 2.50

UNIVERSAL CREDIT - 76% TAX RATE IN 2022/23

Some householders who get the means-tested benefit Universal Credit will keep just 24p of every pound extra they earn – an effective tax rate of 76% - this tax year and next. In some parts of England it could be more - losing up to 78.6p in every pound that is earned, leaving them with barely 21p for every extra pound they earn. Those losses could undermine the work incentives which the new system is designed to create. 

For graduates on incomes high enough to make repayments on their student loan but low enough to get Universal Credit, the deductions would be more, leaving them with less than 27p in the pound. Worst case would be earn £1 keep less than 19p.

Universal credit

Universal Credit has been rolled out from October 2013 to replace six means-tested benefits and tax credits. Now after Covid and the lockdowns it is claimed by around five million people. It is the benefit given to almost all new claims for help with income or rent. It is paid to people on low incomes who cannot work, are looking for work, or work on low or modest pay and have children.

It is supposed to let people keep more of what they earn and thus boost incentives both to return to work and to earn more once in work. For every £1 extra earned the credit is reduced by 55p from 24 November 2021 allowing the claimant to keep 45p. Before that it was 63p and had been 65p. This so called ‘withdrawal rate’ of 55p in the pound is said to be much lower than rates under the previous and allowing people to keep 45p of what they earn is seen as an incentive to work. However, that figure of 55p withdrawal rate is only accurate for people who earn less than £242 a week and are not householders.

There is one complexity to be aware of. People with a child or children and people who re judged to have 'limited capability for work' get what is called a 'work allowance'. This is not extra money but is simply an amount they are allowed to earn before the taper kicks in. It is set at £344 a month if universal credit includes help with housing costs and £573 a month if it does not. So those people can earn up to those amounts and the taper will not apply to those earnings. It does apply though to every pound earned over those amounts. And for everyone else the 55% taper applies to the first pound. 

Taxpayers

Universal Credit is worked out after tax and National Insurance have been deducted. In 2022/23 anyone earning more than £242 a week pays National Insurance and income tax. From 6 November employee's National Insurance rates are being reduced to 12% from the 13.25% which applied from 6 April 2022 to 5 November 2022. That extra 1.25%pts does not sgnificantly affect the calculation for those seven months. National Insurance takes 12p in the pound and income tax which begins at the same level takes another 20p in the pound before their Universal Credit is worked out. That leaves £68. The universal Credit taper then reduces their benefit by 55% of that net amount. The total loss from NI, income tax, and reduction in Universal Credit is just over 69p from each £1 they earn. So they keep less than 31p. But that is only part of the picture.

Householders

Universal Credit, despite its name, does not replace all means-tested benefits. It does not replace the means-tested reduction in council tax which used to be called Council Tax Benefit but since 1 April 2013 has been replaced by a similar scheme which is now called Council Tax Reduction and is operated by local councils. Like all means-tested benefits Council Tax Reduction is withdrawn as income rises. The standard taper is 20p for each £1 rise in net income (after the tax, NI, and Universal Credit withdrawal). In other words for each extra pound of net income help with council tax is reduced by 20p. The result is that for each £1 earned a total of nearly 76p disappears in tax, NI, reduced Universal Credit, and reduced Council Tax Support. The calculation is at the foot of this blogpost.

Localism

In some areas of England and Wales the reduction for every £1 of income earned may be even higher as local councils struggle to save money by raising the taper from 20% to as high as 30%. In areas which raise the Council Tax Reduction taper to 25% householders on Universal Credit who pay tax will find that 77p of each pound earned disappears in deductions. In areas with a 30% taper they will lose nearly 79p and keep barely 21p for each extra pound earned after deductions for income tax, National Insurance, Universal Credit taper, and reduced Council Tax Reduction. 

Students

Students with a Plan 1 or Plan 2 student loan make repayments of 9% of on every pound they earn above a threshold (currently £388 a week for Plan 1 and £524 a week for Plan 2). That is in effect an extra 9% tax and those whose income is low enough to be entitled to Universal Credit lose typically 73p in the extra pound keeping just 27p. If they pay council tax then they keep less than 21p and in areas where the council tax withdrawal rate is 30% they keep just 19p of every extra £1 they earn.

It is a tax

Some people object to the deductions made from a means-tested benefit being called a 'tax'. They say that the taper rate reduction in a subsidy from taxpayers is not a tax. Tax, they say, means a levy on your own money not a reduction in the money the state gives you. 

But it is a tax. And officially so. In his Spring Budget, 8 March 2017, Chancellor Phillip Hammond confirmed that the tapered loss of this benefit was a tax. He confirmed the reduction in the taper rate by saying "the Universal Credit taper rate will be reduced in April from 65% to 63%, cutting tax for 3 million families on low incomes." These words were echoed by Chancellor Rishi Sunak in his Autumn Budget on 27 October 2021 "This is a tax on working people -- and I'm cutting it from 63 to 55 per cent...Let us be in no doubt: this is a tax on work. And a high rate of tax at that."

So it is a tax. And a high one. 

Conclusion

Losing 76% or more of each extra pound you earn is hardly an incentive to work or to work harder. It is almost twice the 42% tax and NI deductions for higher rate taxpayers with incomes over £50,270, three times the minimum wage.

CALCULATION OF TOTAL DEDUCTIONS FOR A TAXPAYER HOUSEHOLDER

FOR EACH £1 OF EXTRA INCOME WITH 20% COUNCIL TAX TAPER SHOWING EFFECT OF 55% UC TAPER FROM APRIL 2022

EARNS EXTRA		£1.00
Tax	20%	-£0.20
NI	12%	-£0.12
Net after tax		£0.68
UC reduction	55%	-£0.37
Net after UC		£0.31
CT Reduction	20%	-£0.06
NET GAIN		£0.24
Effective tax		76%

This blogpost replaces the one originally published 19 September 2012.

17 October 2022
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DELAYS TO FUEL REBATES

Many local councils in England have failed to pay the £150 council tax discount to help with fuel bills by the original deadline of the end of April. The money is due to go to households in Council Tax bands A, B, C, and D.

The Chancellor Rishi Sunak told Parliament six times on 3 February that £150 would be paid 'in April'. He announced it by saying 

We are going to give people a £150 council tax rebate to help with the cost of energy in April, and this discount will not need to be repaid (Hansard col.472).

Answering questions from MPs he repeated five more times that the money would be paid 'in April', explaining to one MP  

By using the council tax system, we can get money to people faster - £150 in April (Hansard col.479).

Later at a Downing Street briefing and in an interview on BBC Newscast he repeated that it would be given 'in April' . The Treasury confirmed that date in a tweet 

In April, 80% of UK households will get a £150 council tax rebate to help manage rising global energy costs.

The Treasury used exactly the same wording on its Facebook page of 3 February and linked to a video of the Chancellor saying to the camera 

Secondly, in April, we're going to give a £150 council tax rebate to households in bands A to D to help with the immediate costs of energy.

A Factsheet issued by the Treasury at the time (a Treasury press officer referred to it in an email to me on 3 February as 'our factsheet') also confirmed the money would be paid 'in April'. 

A Council Tax Information Letter dated 14 February 2022 from the Department for Levelling Up, Housing & Communities (DLUHC) to local authorities in England says

On 3 February 2022, the Department issued a Council Tax Information Letter (CTIL) summarising the Government’s announcement that an Energy Bills Rebate will be provided to households in England in April 2022 to help protect them from rising energy costs.

Deadline changed

But at some stage the Treasury Factsheet was amended to the one now available online with a url indicating it is 'v.2' and the deadline has been changed to 'from April'.

Despite the evidence of Parliament, Twitter, Facebook, and the Factsheet that the original deadline was to pay the money 'in April' the Treasury claimed in a statement to journalists on 30 April 2022 that 

We’ve always been clear...that the £150 council tax rebate to help with the cost of living would be paid “from” April.

It referred to its press release of 3 February which did use the phrase 'from April'. But in Notes to Editors (labelled 'Further Information' in the version now online) it added 

We expect the vast majority of people who pay by Direct Debit to receive this money in April...for households in Bands A-D who do not pay by Direct Debit, their councils will be ready to process their claims in April.

Later guidance from the DLUHC also uses the phrase 'from April'. 

All Council Tax Rebate grants should be paid as soon as possible from April 

Original deadline missed

It is the original deadline set by the Chancellor and the Treasury of 'in April' which local councils up and down England have not met. Some did pay in April, others have said it will be May or even June before households on Direct Debit are paid and it could be as late as 30 September before those who pay in other ways get the £150. The end of September is the final deadline set by the Government for the payments to be made and after that it has made clear that any money not spent by councils on the rebate by 30 November 2022 would be taken back.

What to do

If you live in a band A-D home in England and are still waiting for your council tax Energy Bills Rebate the councils do not want you to call them. Check your council's website, though many of those I have seen have only very sparse information. 

• If you pay by Direct Debit the rebate should be paid automatically. If it has not been credited to your bank account by the end of June you should contact the council and ask when you will be paid. Remind the council that the Chancellor and the Treasury initially promised the payment 'in April'.
• People who do not pay by Direct Debit will probably have to wait longer. This group will include pensioners who get their council tax reduced to zero because of their low income. If the council has not contacted you by the end of June to ask for bank details then you should call the council and ask why. Remind the council that the Treasury said councils would be ready to process these claims 'in April' and that 'almost all households should see the full benefit by May'.

If you live in a band E, F, G, or H home but you are in hardship and need help with your energy bills you will have to apply to the council for money from the Discretionary Fund which the Government has provided to all councils in England.

Rest of the UK

In Scotland and Wales the payment is due to everyone in a band A-D home and is extended in both countries to people in higher bands E-H who get council tax reduction due to their low income. Both countries also have some extra funding to help those who fall outside the scope of the payment but are still in hardship. 

In Scotland councils can make the payment by reducing the council tax bill by £150 and many have done that. 

In Northern Ireland there is no council tax and no decision has yet been taken about how the payment will be made.

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