Pension fees: ‘Millions set to miss out on full state pension’
The Government has been criticised for leaving pensioners in a state of “total confusion” about why some are not receiving the full state pension.
The new flat rate state pension, which is £159.55 a week for this tax year, was introduced in April 2016 and is available to anyone who has built up 35 qualifying years’ worth of National Insurance credits. But i has received many emails from readers who say they are not receiving the full state pension, despite having worked for most of their adult life. Contracted out without being told The reason is often because they were contracted out – sometimes without their knowledge – at some point in their career.
This meant they paid a reduced rate of national insurance in exchange for a lower state pension.
Readers say they were never told they had been contracted out. Others add they were told they had enough qualifying years, only to get a nasty surprise when they retired.
According to government figures, more than 90,000 were denied the full state pension in the first five months of the new scheme. “I have been a state registered nurse for 42 years and have only recently found out that I will not be getting the flat rate state pension because I was contracted out. I was not aware that this had occurred and did not find out until I got my state pension forecast,” said Gillian Swain.
Figures from the Department of Work and Pensions (DWP) show that 63,440 people were receiving the full state pension in August, five months after the new system was introduced. In total, almost 154,000 started receiving the state pension over the same time period – meaning more than half (90,560) did not qualify to receive the full amount. Over the full year this could amount to 200,000 people.
Peter Murray, 62 I am approaching my 63rd birthday and took early retirement four years ago. I am currently living on my ISA savings and continuing to contribute to my pension pot before I eventually start an income drawdown. As preparation for the drawdown I enquired what the state pension would be for myself and my wife. The results were a surprise.
My wife, having taken out time to bring up two children and worked in relatively low paid jobs, qualifies for the full state pension. Myself, having worked for 37 years in a relatively well paid job and contributed substantial amounts to both the state pension pot and my personal pension pot, qualifies for a state pension of £119 at today’s rate.
The reason for me missing out on £36 per week is undoubtedly due to contracting out. What I have no idea about is whether my reduced contributions during the time I was contracted out (probably at least 25 years of my 37 years contribution) represented a good investment compared to the £1,872 per annum I am losing in my new state pension.
Part of the problem with pensions is that you do not know whether you are doing the right thing until it’s too late.
Steve Webb, former Minister of State for Pensions and now director of policy at Royal London, said the government had a difficult decision to make when launching the new state pension.
It couldn’t simply give people who had contracted out the full state pension, as this would have been unfair to people who had paid extra national insurance payments throughout their career. “They and their employer paid less national insurance contributions and in return the scheme had to promise to replace part of the state pension.
To be fair, these were generally the best workplace pension schemes (people would kill today to be able to join a final salary pension scheme) but that doesn’t change the fact that people didn’t really understand what was going on.”
A spokesman from the DWP acknowledged the contracting out system was not always fairly handled in the past but stressed that no one is losing out under the system. He said people will be receiving the shortfall in their occupational pension, as their national insurance relief would have been paid into this pot. “Private or occupational schemes will, in most cases, provide a pension at least equivalent to the additional state pension foregone,” he added.
Baroness Ros Altmann, who was pensions adviser to the Government between May 2015 and July 2016, has said it is “simply untrue” that people are guaranteed to be receiving the state pensions shortfall in their contracted out scheme.
She explains this is the case if people were contracted out in the public sector, but that if people were contracted out into private or contribution schemes then it is not guaranteed they will get the shortfall equivalent as the final outcome will depend on how their investments have performed. “People paying into a defined contribution type scheme may or may not get more depending on how their investments did. That’s the risk they would have taken but unfortunately many people were not explicitly asked,” said Baroness Altmann. People given unrealistic expectations “The government should never have told people they should expect the full rate.
People were given unrealistic expectations. The government needs to help people start to understand what’s going on, which it hasn’t done so.” The state pension age is currently 65 and it rise to 66 in October 2020, and to 67 between 2026 and 2028.
Another review of the state pension age was recently delayed ahead of the general election Contracting out was phased out in 2012 and the DWP estimates that by the mid 2030s, 85 per cent of people reaching the state pension age will get the full amount.
Elaine Davenport, 63 I worked for a hospice for 10 years and its payroll was managed through the NHS. Consequently I had the choice of joining the NHS pension scheme, which was contracted out. If I was informed, I clearly did not understand the implications. I was not aware this could affect my state pension.
I have 43 years of contributions but as 10 were contracted out I will not have access to the very hyped up new flat rate. I was also hit by the increase in the state pension age for women. As I was born in January 1954, I have to wait until I’m 65 & five months to access my reduced state pension.
I estimate that I will have lost around £42,000 due to the lower state pension I will receive, and because I was not able to draw my state pension at 60. This was the retirement age I had planned for since I started work aged 16 in 1970.
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