Overview

The system of Social Security benefits in the UK has undergone (and is set to continue to undergo) considerable changes since it was introduced in 1948. The current system envelops a considerable number of benefits which may be payable to individuals in different circumstances.  The traditional distinction in consideration of benefits is between contributory and non-contributory benefits, and benefits which are means-tested and those which are not.

Where the benefit is said to be contributory, it means that its availability depends on the individual (or his/her spouse in certain circumstances) having paid a sufficient number of National Insurance contributions to qualify. Examples of contributory benefits are retirement pension, long-term incapacity benefit and bereavement allowance (previously widow’s benefit).

Non-contributory benefits, on the other hand, will be available to individuals regardless of their contribution record but depend on the claimant’s personal circumstances. Non-contributory benefits would include child benefit, disability living allowance and income support. Some of these will not depend on the financial circumstances of the individual (eg. child benefit which is universally available to those with children below a certain age) but others may depend on the financial standing of the claimant, such as income support.

Another characteristic of the benefits is that they may be means-tested or not.  Generally speaking, the term ‘means-tested’ benefit would refer to the fact that the benefit will only be payable if the claimant’s income, or capital available to him, fall below a certain monetary level.  In certain cases this will dictate whether the benefit is available at all.  In other cases the actual amount of benefit payable will depend also on the other resources of the claimant, for example, in the case of income support, the amount of which varies depending on the claimant’s personal financial situation.

When considering the level of benefits available to the individual in given circumstances it is important to remember that some benefits may carry a tax liability.  The following table lists the currently available main Social Security benefits and indicates whether they are contributory, means-tested or taxable.

A significant change to the benefit system occurred on 27th October 2008 when the Employment and Support Allowance was introduced to replace new claims for Incapacity benefit.

Benefit summary

In-depth coverage of the available Social Security benefits is outside the scope of Techlink and is a specialist issue. However, those issues which are relevant to financial planning for individuals, particularly when considering protection in the event of death or disability, will be covered in some detail, as well as some general provisions in connection with the eligibility rules.

Means-testing – key provisions

In the case of benefits which depend on means-testing, such as income support, family credit, housing benefit, council tax benefit etc, it is the person’s income and/or capital that will dictate whether the person will be entitled to the benefits.  The same rules as for income support will also apply to the provision of long-term care in nursing homes for the elderly (however capital limits are different), although that provision is now via the local authority rather than the Department of Social Security.

The key capital limits are

· £6,000 to £16,000 per annum for income support

· £6,000 to £16,000 for housing and council tax benefit (under 60s).

· £10,000 to £16,000 for housing and council tax benefit (over 60s)

· £14,250 to £23,250 for residential or nursing home assistance (England)

If an individual has capital available over the larger amount he will not qualify for any benefits.  For capital available between the two limits the level of benefit will be reduced.  The reduction is based on ‘tariff income’ which is calculated by converting capital into income.  For example, for every £250 of capital over the lower limits of £6,000 or £14,250 (every £500 of capital over £10,000 for the over 60s housing and council tax benefit) the individual will be assessed as having an income of £1 per week.  This is because, generally speaking, the income support benefit and the other means-tested benefits are only available where the weekly income is below a certain level. The income would include earnings, pensions and, as explained above, the tariff income from any capital available.

The rules for calculating the amount of benefits are complex as there are a number of ‘disregards’ ie. certain payments which are not regarded as income or earnings for the purposes of the means test.  Capital disregards are listed in Sch 10 of the Income Support (General) Regulations 1987.  Interestingly, under para 15 of that Schedule, the surrender value of any policy of life insurance is to be disregarded.  A question has been raised whether this includes single premium investment bonds and based on the current available evidence this appears to be the case.

It should be noted that should an individual intending to claim means-tested social security benefits arrange for a transfer of his available cash, say from a bank account into a single premium bond, even if the value of the bond could then be disregarded, the transfer of money into the bond is likely to fall within the so called ‘deprivation’ provisions, with the result that the equivalent amount would be treated as ‘notional’ capital in the hands of the claimant, ie. possibly resulting in the denial of benefits.  In each case, clearly, the individual seeking the benefits would need specialist advice which is normally available from the Government or through the Citizens Advice Bureau.

It is important to remember that when calculating income and capital levels, for income support purposes, a couple, whether married or unmarried, is treated as a unit and only one partner of a married or unmarried couple may claim the benefit.  The weekly needs, income and capital of the claimant, partner and any child dependant will be assessed together as a unit.  This, in particular, has to be borne in mind where payments may be available from a family trust, for example, to the children of the claimant.  If a claimant is entitled to income under a trust, then such income will be taken into account in assessing his level of income before he becomes eligible for income support. Where the trust is discretionary and the beneficiary is not entitled to income from it, then any beneficial rights under the trust can be disregarded, although to the extent that income or capital is paid to the beneficiary, that will be taken into account in assessing the benefits.

Impact of social security benefits on financial planning

The existence of and the level of available social security benefits in a particular set of circumstances is clearly relevant to planning in the area of protection needs, particularly on death and disability.  In most cases the level of the required benefit, for example the level of life assurance needed in the event of the death of the breadwinner or the level of income protection benefit needed to replace income on sickness or disability, will be calculated by working out first the amount that is needed to maintain a reasonable standard of living for the individual or their dependants and then taking away from it the amounts already provided by the State and from private or employer-funded insurance.  For this reason, any financial planner involved in the ‘protection business’ must be familiar with the key benefits and the levels of benefit that will be available in the event of death in the family or in the event of sickness or disability.

Another area that is relevant to financial planning is that of State pension provision. As with calculating protection needs on death or disability, in order to work out the required level of private pension funding to provide the desired level of benefits in retirement, the financial planner will have to take into account the benefits available from the State ie. basic State pension and any additional pension eg SERPS or S2P.  All of these issues are considered in detail in the topics that follow.

Jobseeker’s allowance

In addition to the benefits available on death, disability or in the old age, there is one additional benefit that financial planners need to be aware of in view of the number of people that are or could be affected by it and that is the jobseeker’s allowance.  The jobseeker’s allowance is a Social Security benefit that was introduced in October 1996 to replace unemployment benefit (which no longer exists since that date) and income support for the long-term unemployed.  Jobseeker’s allowance is different from other Social Security benefits in that it contains both a contributory and a means-tested element.  The contribution-based jobseeker’s allowance is paid to people who have paid the required number of National Insurance contributions and is paid only for a maximum of six months.  The income-based jobseeker’s allowance, which is means-tested, is paid to people who do not have enough money to live on and has effectively replaced income support payable to those who previously would have been entitled to it but were required to report availability for work.  The income-based jobseeker’s allowance is payable for an indefinite period and is payable on a basis similar to income support, ie. it depends on the available weekly income of the claimant.

To be eligible for the jobseeker’s allowance, claimants must be available for and actively seeking employment and must enter into a jobseeker’s agreement.  Benefit is only payable to those under pensionable age ie a woman who has at least reached the State pension age for women and a man who has attained age 65.

Benefit rates

The key benefit rates applicable from April 2012 are listed below along with last year’s figures.  The key ones are noted in the table below (all are weekly amounts).  Most contributory benefits rise by the RPI. Most income-related benefits rise by the ROSSI.

Harmonisation of EU social security rules

Harmonisation of European Union (EU) social security rules came into force on 1 June 2002. These rules apply to all European Economic Area (EEA) countries and EEA nationals. The EEA means the EU countries plus Iceland, Liechtenstein and Norway. However, the Swiss authorities have adopted the EU rules in respect of EU states and EU nationals. As such, the old agreements between Switzerland and each of the EU countries no longer apply to Swiss and EU nationals but continue to be used in respect of third country nationals.

There has been an amendment to the European Free Trade Agreement (EFTA) covering the social security relationship between Iceland, Liechtenstein, Norway and Switzerland but it is as yet unclear how the authorities will interpret it. The UK authorities are saying it means that a national of Iceland, Liechtenstein or Norway who is sent from the UK to work in Switzerland is not covered by the EU legislation but can be covered by the old agreement between the UK and Switzerland. However, the Swiss authorities are saying that a Swiss national assigned, for example, to work in Norway, will be issued with a E101 certificate (to confirm a continuing national insurance contributions liability) amended to show that it relates to Norway.