Savers snared by state pension trap — and even an ex-minister slams taxman’s penny-pinching
TODAY, Money Mail lays bare the Government’s shameful betrayal of savers who are desperate to boost their state pensions.
We can reveal that the taxman is unfairly pocketing thousands of pounds from people approaching state pension age.
Savers in their 50s and 60s have handed over the money under the impression that it will boost their weekly state pension payouts. They have been told they have gaps in their National Insurance records and are due less than the full payout in retirement.
It is supposed to be possible to top-up your pension under a scheme, run by the Department for Work and Pensions (DWP) and HM Revenue & Customs (HMRC), which lets you fill in any gaps in your National Insurance record. But after making their payments, savers were told they wouldn’t qualify for any extra pension.
This is typically because they have become entangled in a web of rules governing top-ups to the new and the old state pensions.
Those affected say they received baffling advice from government officials throughout the process. They insist they acted in good faith. Yet when they have asked for a refund, the taxman has refused, saying it has already cashed their cheques.
Victims accuse the government of profiting from innocent mistakes and say the loss will leave them living on a pittance in old age. While former Pensions Minister Steve Webb, now director of insurer Royal London, has said the taxman is treating customers asking for refunds as if they’re ‘pulling a fast one’.
HMRC ‘ACTING LIKE SPIVS’ AMID PENSION CONFUSION
TO GET to the bottom of the muddle, we must first consider the changes made in April 2016.
The new state pension pays up to £159.55 a week — but you need 35 years of full National Insurance contributions under the new regime to get the full amount. If you have paid less, you will get a smaller pension.
The old state pension paid £122.30 a week if you had 30 years of NI contributions — again, fewer contributions meant a smaller pension. This was boosted by earnings-based top-ups known variously as Serps or State Second Pensions.
But many people — including teachers, nurses and those in company-sponsored pensions — did not pay into this top-up for all of their career, so they could end up well short of the £159.55 offered by the new state pension.
Since April 2016, everyone has contributed to the new pension. This could be because you are still working (and, therefore, pay NI from your earnings); through NI credits while you’re on maternity leave or benefits; or because you’re a man beyond the state pension age for women, when you’ll receive automatic credits.
But the amount you receive at retirement is still based on your entitlement under both the old and new schemes. You are given the better of the two.
Now, many savers are receiving pension forecasts which show they are on course to receive less than £159.55 a week. (Note that to get the full amount under the new scheme, you typically need to have paid the old earnings-based topups for most of your working life.)
Naturally, they want to boost their state pensions, especially if they believe they have an incomplete NI record. And this is where the trouble starts.
It is possible to plug gaps from the past six years (sometimes ten) and boost your state pension with a scheme known as Class 3 voluntary National Insurance — but it works only in very specific circumstances.
The cost will depend on how long you missed payments, but should be a maximum of £741 per year. This could buy an additional £237a-year income for life under the new state pension. But it can be incredibly hard to work out whether you qualify.
The key date is April 2016. If you have 30 years of full NI contributions before then and the govern- ment decides you would be better off on the old system, there is no point in making extra contributions to cover past years — even if you don’t have the full £159.55 a week offered by the new scheme.
They won’t boost your pension because the money will be going towards the old scheme rather than the new one.
However, if the Government works out you’d be better off with the new state pension and you don’t have the full 35 years of NI contributions, it will let you plug gaps from before April 2016. everyone can use Class 3 NI for tax years from 2016 to 2017 onwards, but this will only increase entitlement to the new scheme, not the old.
Savers say these vital wrinkles in the rules are not being communicated to them until after their cheques have been cashed.
REFUSED REFUND FOR £7,000 MISTAKE
JOHN MULLEN, 65, is a victim of the chaos. When he reached pension age on December 29 last year, he sent a cheque for £3,500 to HMRC to cover gaps across seven years of NI contributions from 2006-2007 to 2013-2014.
He included a note saying he hoped this would get him the ‘full’ state pension. The cheque was cashed in March. But John then realised his pension would be based on the old system — in which he already had a full NI record.
He’s been battling for six months to get his money back. HMRC finally agreed after we intervened.
John, who is hard of hearing and needed help from Citizens Advice to call HMRC, accuses the Government of ‘acting like spivs’. He says: ‘I acted in good faith and feel I have been treated with contempt.’
HMRC sent him a letter in which it appears to admit it gave him misleading guidance, saying: ‘We previously wrote to tell you that there was a shortfall in your National Insurance contributions record.’ But when John asked for his money back, the taxman told him ‘no refund can be made’.
It explained that even though his pension would not increase, the Class 3 NI payments qualified him for ‘bereavement benefits’. It did not explain what these were.
In fact, they refer to the amount your husband, wife, or civil partner would get if you died before state pension age.
The letter says: ‘Regulation 52 of Social Security (Contributions) Regulations 2001 allows for a refund of contributions where payments of those contributions were made in error . . .
Although you stated in your letter that you have sufficient years for pension purposes, the payment of Class 3 contributions still makes a qualifying year towards bereavement benefits therefore, unfortunately, no refund can be made.’
John is not married and has no dependants, so bereavement benefits are worthless. He was also on the verge of claiming the state pension, upon which any benefit would have expired.
Retired French teacher ursula Tonkyn, 63, paid almost £1,300 to HMRC in February 2016 to cover incomplete NI contributions over two years. She says she was told
by HMRC and DWP that she had gaps in her NI record for 2010 to 2012. But in a letter dated October 19, 2017, DWP says she has already amassed 32 qualifying years. It turned out she was entitled to more state pension under the old system than the new one.
As the old scheme required only 30 years for the full amount, she could not boost it any further.
Ursula, who lives in Norfolk with her husband Edwin, says she found dealing with DWP and HMRC baffling. ‘It’s very confusing,’ she says. ‘No one seems to know what they are doing. How can I be expected to make a correct decision?’
HMRC has since told her it is rejecting her refund request on the basis that the extra contributions have given her bereavement benefits. But, once again, these would have lasted only until she reached state pension age — just a few months later.
Robert Buchanan, 56, a retired civil servant from Musselburgh in East Lothian, Scotland, paid £ 654 to HMRC after checking his NI record on a government website and seeing that he had only 34 of the 35 years of NI payments he thought he needed. However, the missing year was 2011 — which meant that any voluntary NI payment would have gone towards the old state pension, not the new one. They made no difference to his payout as he already had the 30 years required for the full amount of old state pension.
‘I called the government helpline and was told by the adviser that I had little hope of getting my money back,’ he says. ‘I feel like I’ve been duped — it’s a hardship I simply can’t afford on my limited budget.’
John and Jan Airey, 59 and 58, from Cumbria, lost more than £7,000 because they mistakenly thought they could boost their payouts by filling in their NI records from before 2016.
They feel like they were penalised for an honest mistake and cannot understand why staff did not warn them before cashing their cheques.
‘It’s as serious as if we had paid £7,000 for a second-hand car only to find out the dealer has run off with our money,’ they told HMRC in an email.
The couple, both former IT workers who are now property landlords, went on: ‘ Before ( and not after) cashing our cheques, HMRC should have advised us that we need to check whether paying these voluntary years backdated would increase our pension.’
Again, HMRC refused a refund on the grounds that the payment gave them bereavement entitlement.
CUSTOMERS LEFT FEELING LIKE CHEATS
FORMER Pensions Minister Steve Webb says: ‘Dealing with a government department shouldn’t leave you feeling like you would if you had handed over money to some dodgy site on the internet.
‘People have worked hard for their pension savings and when they make genuine mistakes they should not be treated like they are trying to pull a fast one when they ask for their money back.’
After Money Mail and sister website This Is Money contacted HMRC, it agreed to refund all the victims quoted here.
A spokesman says: ‘HMRC has refunded these taxpayers as their additional National Insurance contributions did not, in their cases, contribute to further entitlement to benefits. We apologise to the readers, who we let down. We should have refunded their payments when they first requested it.
‘ Customers who make voluntary contributions in good faith, whose payment does not create a benefit entitlement at the time of payment, will have their money refunded.’
A spokesman for DWP says: ‘Voluntary contributions can help to boost your state pension but they might not be right for everyone and can be a significant financial investment. This is why the online Check Your State Pension service signposts anyone with gaps in their record to speak to the Future Pension Centre (0345 3000 168) to find out more about the scheme and how it could work for them, or to seek independent advice.’
For more on pensions, turn to the Ask Tony column, page 54.