benefits

SMI Change: What You Need to Know

Guest Post: SMI Change: What You Need to Know

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This is a guest post by Sara Williams, who blogs about debt and credit ratings at Debt Camel. She is also an adviser at Citizens Advice.

If you get government help with some of your mortgage costs, you should have heard that this help, known as Support for Mortgage Interest (SMI), is changing from April 2018. About half the people getting SMI are pensioners who get Pension Credit. Many of the rest are disabled.

At the moment the SMI help is given as a “benefit”. But from April 2018, it will only be given as a loan that is secured on your house, so it has to be repaid when the house is sold.

This may sound very worrying. And some people are saying that it isn’t being explained very well by Serco, the firm the DWP is using to try to persuade people to sign the new loan documentation.

With only 6 weeks to go until the change, less than 5% of the people getting SMI have agreed to the new loan. And for people who don’t agree, their SMI will stop in April. This could mean people getting into mortgage arrears and ultimately having their house repossessed.

Questions people ask about the SMI change

Hundreds of comments have been left on an article I wrote about this SMI change. Here are some of the questions people are asking:

How much help will I get?

The same as now. Whatever SMI is currently paid to your mortgage lender, the same amount will be paid after April if you agree to the new loan.

But I’ll need more money each month as interest is now being added to this new loan?

You don’t have to start repaying this new loan, or the interest on it until your house is sold. So on an everyday basis, you will be in the same position as you are now.

Will the interest rate on the new loan increase?

The interest on the will be fixed to the UK Gilt rate – at the start it will be 1.7%. This is the rate at which the UK government can borrow – it will always be cheaper than most mortgage rates.

The loan is from the government, you don’t need to worry that Serco will change these rules and charge you more.

Will there be a delay before it’s paid?

If you are already getting SMI, the switch to the loan will be seamless; there won’t be any months when you aren’t helped.

If you aren’t currently getting SMI, the same waiting period of 39 weeks will apply as now.

Can I repay it if I get a new job?

Yes, you can repay the loan, or part of it, at any time. But it may be better to overpay your mortgage if you have spare money, as your mortgage rate will probably be higher than the interest rate on the SMI loan.

What other options are there?

Some options include:

  • ask friends or family to help you with your mortgage costs – this isn’t possible for many people;
  • get a lodger – but this could reduce your other benefits so get advice from Citizens Advice before deciding to do this;
  • use up your savings – but most people won’t have much and using what you have could leave you unable to afford an emergency;
  • sell the house and downsize or rent. This is a big change. It may be a good idea if your house is too large or difficult for you to manage or you have an interest-only mortgage ending soon, but you need advice on how it will affect your benefits first.

Should you agree to this?

I don’t like the change. I think it’s unfair and if people lose their homes, it could cost the government more money than it is supposed to save,

But you should make a pragmatic decision based on whether you have any better alternatives. Don’t be swayed by feelings about unfairness or politics.

Complain to your MP if you feel it’s unfair – these changes were discussed in Parliament, but they didn’t get much attention at the time – but don’t reject this loan without a better option.

The loan is cheap. Unless there are relatives who could help you, most people won’t have a good alternative. If you aren’t sure, or you have detailed questions, e.g. about what you are being asked to sign and its implications, go to your local Citizens Advice and ask for advice about the proposed loan and your finances, benefits and any other debts.

 

Thank you very much to Sara for a concise and informative article about the SMI change, which is clearly likely to affect some readers of this blog. If that includes you, with the new system coming in after 5 April 2018, it’s important to get to grips with the change and decide what is the best course of action for you.

If you have any comments, as always, feel free to post them below.



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How to Check What Your State Pension Will Be

How to Check What Your State Pension Will Be

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Today I thought I would discuss the state pension. This is a subject that concerns everyone, but may be of particular interest to readers of this blog who are approaching retirement age.

Of course, many people have one or more workplace or private pensions. However, the state pension is still a very important component of most people’s income in later life.

And unlike many workplace/private pensions, it rises automatically every year at the rate of inflation or above (under the current triple lock guarantee). That makes it increasingly valuable as you get older.

In this article I’ll be revealing how to check how much state pension you are due and when. But I’ll start with a look at the various changes to the state pension in the last few years and how they affect anyone coming up to pensionable age now.

Speaking of which, let’s start with one of the biggest changes…

Your State Pension Age

It’s unlikely to have escaped your notice that the pension age is rising. At present men can access their state pension at 65 while women get it at around 64. The age for women is in transition at the moment as it rises to equalize with men in 2018.

By 2020, the pension age for both men and women will go up to 66. Between 2026 and 2028 it is due to rise again to 67, and under current government plans it will go up again to 68 in 2037.

You can check when exactly you can start to claim the state pension by entering your date of birth and gender at this government website.

The New Flat Rate Pension

This is the other major change to the state pension in recent years.

Prior to April 2016 everyone received a basic pension (currently £122.30 a week). This was (and still is) topped up by additional state pension elements (S2P and Serps) which you accrued during your working life.

Anyone retiring from April 2016 onwards now receives a ‘flat rate’ pension currently worth £159.55 a week. If, however, you ‘contracted out’ of S2P and Serps at some point in your working life, you may get less than this. The presumption is that your contracted-out pension will provide another source of income for you, so you don’t need (or qualify for) the full flat-rate pension.

A further complication is that the government doesn’t want people who accrued large state pension entitlements under the old scheme (basic pension plus S2P and SERPS) to miss out. So when you reach pension age your entitlement under both the old and new methods of calculation will be worked out and you will receive the larger of the two. That means some people could actually qualify for more than the new flat-rate pension (£159.55 currently). If this is the case, it will be shown separately as a ‘protected payment’ on your state pension statement.

Also, to get the maximum new flat-rate pension you need to have at least 35 years of qualifying National Insurance contributions at the full (non-contracted-out) rate. If you have less than that you will get a reduced pension; and if less than 10 years, nothing at all.

In some circumstances – which I’ll discuss shortly – you may be able to pay a lump sum to fill in gaps in your record. Even if you do have 35 years or more of contributions, though, it may not entitle you to a full pension. The government website (see below) tells me I have 37 years of contributions, but because I was contracted-out for some of these years and so paying a lower rate of National Insurance I still have to contribute for another three years to get the full flat-rate pension. Here’s a screen capture of my actual statement:

State pension statement

If you’re confused by all this, I’m not surprised. The rules are complicated and still being tweaked. So to avoid any nasty surprises it’s important to check what you are due to receive as well as when you are due to do so. There is now an official website where you can access all this information in one place.

Checking Your State Pension

Anyone aged 55 or over who has lived and worked in the UK for 10 years or more (even if they are not British citizens) can now visit https://www.gov.uk/check-state-pension to get an estimate of how much state pension they will receive when they retire.

Doing this is a bit more involved than just checking your start date on the pension age site mentioned earlier. You have to sign in with proof of identity, so allow a bit of time for this. If you already have an HMRC online tax account, the good news is you can use this to log in.

Once you’ve done so, you will see a forecast of how much state pension you will get once you’re eligible to start receiving it. This is based on current figures, so if you won’t reach retirement age for a few years yet, it will of course have risen by that time.

Boosting Your State Pension

If you’re disappointed by the amount forecast, one thing you can do to boost your state pension is defer taking it. Under the new rules you will receive an extra 1% for every 9 weeks you put off claiming.

Obviously, to benefit from this overall you should be in good health. For women especially, as their life expectancy tends to be a few years longer than men, deferring your pension (if you can afford to do so) could well be a profitable option. In a way this is a form of investment, underwritten by the government.

No special action is required to defer taking your pension. You just delay claiming and it will be assumed that you wish to defer it.

Another thing you may be able to do to boost your state pension is buy extra voluntary contributions to fill in any gaps in your record. Buying a year of extra contributions (normally Class 3 National Insurance) costs around £733 and will boost your pension by around £230 or £4600 over a 20-year retirement. This can be well worth doing if, for example, you were contracted out for several years.

There are some restrictions, however. In particular, as a general rule it must be done within six years of the end of the tax year concerned. So if the gaps in your record go back further than this, it’s unlikely you will be allowed to make up the whole shortfall in this way.

There’s also the question whether paying voluntary contributions to fill gaps in your record will be cost-effective for you. There is no easy way of calculating this, and I highly recommend getting advice from an independent financial adviser specializing in pensions if you are thinking of going down this route. It’s also a good idea to contact the government’s Future Pension Centre to find out what your options are.

Finally , it should be said that while the state pension provides a baseline income (currently equivalent to around £8,300 a year), on its own it won’t stretch to many (or any) luxuries. Most people will have private or workplace pensions and perhaps other investments as well, and this will be very important if you hope to enjoy your retirement rather than merely survive it. I will look at these in more detail in future posts.

As ever, if you have any comments or questions on this post, please do leave them below.



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