Members reading this may be surprised that state pensions can be reduced in certain circumstances when someone is widowed. It’s going to be rare, but a couple who have both built up full pensions, or near enough, and are contracted out, are potentially at risk.

In almost all cases, a widow/widower will be better off in terms of pension income overall. In the cases we have seen, the cut was £18 per week and the gain on that section of occupational widows pension £37. Then there would be the rest of the deceased’s occupational pension.

So why does this happen? The state pension prior to 2016 was made up of various parts; the relevant section that may be inheritable is the additional state pension. This was known as SERPS (State Earnings Related Pension Scheme) until 2002, then S2P (State Second Pension) until 2016.

Those who are in a good occupational scheme such as the civil service’s paid less in National Insurance contributions due to the contracting out of the additional pension.

Civil servants were covered by their occupational scheme, not the state, and that was reflected in the state pension. Individuals built up a basic state pension, but the occupational scheme picked up the service that otherwise would have been covered by extra National Insurance.

This could only happen if the scheme met requirements that made it better than the extra state pension. It was designed to make the additional pension only for those who had no occupational pension. This was automatic and not a choice. In 2016, the single-tier state pension came in and most people paid the same National Insurance.

So, this is a legacy arrangement to be seen in the context that everyone widowed who was below state pension age in 2016 gets no widows/widowers pension at all. 

Pension caps
There is a cap on how much SERPS/S2P one can have. If someone has the maximum cap of SERPS/S2P, but inheriting 50 per cent of their late partner’s SERPS/S2P pension takes them over the cap, this means a recalculation of contracted out benefits.

The Department for Work and Pensions works on the principle that if benefit is covered by the scheme, under the contracting out arrangements it cannot be paid by the state as well. The benefit can only be paid once either through the occupational scheme or by the state.

An individual when widowed may inherit 50 per cent of their deceased partner’s state and occupational pension. When the individual in their own right has reached the cap on additional pension, this is where
problems may occur.

This means, having inherited the SERPS/S2P pension (which one may not actually receive because it is over the cap), this is seen as a gain.

The widow/widower also inherits the section of service covered by the deceased’s occupational pension. This means as the scheme has covered that service, it is a loss on the state pension side. Then, because of the maximum cap on that section of pension, an individual could lose on the state pension only because they are now covered by contracted out benefits in the scheme – in this case, their late partner’s scheme.

So, by benefiting from the late partner’s occupational pension, there is an adjustment to the individual state pension. There should always be an overall gain in pension income; it is just that a scheme is paying something the state was paying before.

This should only affect couples who have maximum National Insurance and were contracted out. Traditionally, widows often had gaps in National Insurance, so benefited from both state and scheme as they did not hit the cap on SERPS/S2P. But as times change and women have fuller National Insurance records, this is affecting more people.

It is the reflection of women working, and of course National Insurance credit for child-rearing and caring, that has led to the abolition of widows/widowers state benefits post-April 2016.