Get your state pension back on the RIGHT track
Millions of Britons are in for a nasty shock over their retirement income
WORKERS aged 40 and over are being urged to obtain a forecast of their state pension to avoid huge financial disappointment when they reach official retirement age. It has never been easier to obtain this information. Nor has it been more important to act early to squeeze the best value from the state scheme.
But many accessing their forecast will be shocked at what they find.
FLAT-RATE PENSION
A NEW state pension now applies to those reaching retirement – it has been in force since April last year.
This replaces the old basic state pension and various top-up arrangements: Serps, the State Second Pension or graduated state pension.
The new pension promises £159.95 a week for those who have made the required 35 years of National Insurance contributions.
All hail pensions equality. But in reality some pensioners are more equal than others.
Steve Webb, former Coalition Government Pensions Minister and now director of policy at insurer Royal London, says: ‘Many people think that if they have 35 years of contributions they will get a full pension ... and get a nasty shock when they do not.’
The main reason many do not receive the full amount is they have paid less in National Insurance than other people.
Webb says: ‘This principally happens if they were contracted out of the top-up state pension.’
CONTRACTING-OUT HANGOVER
MILLIONS of people contracted out. This meant National Insurance contributions were diverted into a workplace or personal pension.
The deal was promoted heavily by the Conservative Government in the late 1980s.
For a period savers were given sweeteners in the form of enhanced rebates – and they paid lower National Insurance rates.
The expectation was that by being invested in the stock market these contributions would provide a bigger retirement income than the state top-up equivalent.
The arrangement ended in 2012 for contracted-out personal pensions and last year for workplacebased schemes.
But it has left a tricky financial legacy for many.
This is because low interest rates have conspired against many of those who contracted out.
Those whose rebates went into workplace schemes are protected but millions who contracted out into personal plans are not.
The Department for Work and Pensions says no one who qualifies for the new state pension will be left with less than they would have received under the old system.
It says: ‘The new state pension provides a solid foundation for people to build their private pensions savings.
‘People who have been contracted out will usually have paid less in National Insurance over the years while they built up a private pension which they will also benefit from in retirement.’
Carl Emmerson, of research group the Institute for Fiscal Studies, says there will be state pension winners as well as losers.
He says: ‘For those contracted out into defined contribution pension schemes, whether their pension is lower, the same, or higher than the pension they would have got from the state depends on the investment return that they achieved.
‘The original rebate offered was such that it looked a good deal for many people, especially younger workers. But it was cut back.
‘Some will have achieved greater investment returns than was assumed when the rebate was set – others lower.’