Having a final salary scheme will cut your state pension by thousands
HUNDREDS of thousands of workers will lose an average of £55 a week from their flat-rate state pension when it is introduced in April, figures reveal.
Of the five million who will qualify for the supposed universal payout of £151.25 a week in the first ten years, 2.4million will get less than the full amount. By 2035, four million retirees will have missed out.
Those affected are workers who have contracted out of the state second pension (also known as Serps) at some point in their career – typically because they were in a final salary scheme.
Many others hit will have a defined contribution pension and were encouraged to contract out and save into a private scheme instead.
Anyone who has been contracted out since before 1997 will have an average of £55 deducted. Those who contracted out after this date will have an average of £20 taken away.
It is the latest in a string of bitter disappointments and broken promises for a generation of workers who believed anyone who worked full-time for 35 years would be entitled the new flat-rate pension of £151.25.
Neil Duncan- Jordan, of campaign group the National Pensioners Convention, said: ‘The new pension was supposed to be much simpler than the old system but that has turned out to be a nonsense. It is a dog’s breakfast, and we face decades more of this confusion.
’A lot of people are going to get far less than they expected and it is appalling they have not been given proper explanations of how things are going to work. Ministers have been disingenuous about what is going on.’
The new state pension was unveiled by the Coalition government and promised to pay a higher amount than the current system. In 2013, Work and Pensions Secretary Iain Duncan Smith said: ‘ The single- tier pension will mean people have certainty i n what they can expect from the State – 35 years worth of National Insurance contributions will mean a full basic state pension.’
The Government said the new system would be simpler and fairer, with more women able to claim a pension in their own right, and the current confusing system of top-ups and credits scrapped. But for hundreds of thousands of savers approaching retirement age, this is not proving to be the case. Earlier this week, Money Mail revealed how just 80,000 women out of the 1.2million people reaching pension age between 2016 and 2018 would receive the full amount. It followed an earlier revelation that in the first year of the new state pension, only 37 per cent of retirees would claim the maximum payout.
The reason so many f ace reductions in their new state pension is because of a system known as contracting out. This was where workers and employers decided to opt out of the state second pension Serps, which provided a top-up to the basic state payout. In exchange for giving up this right they were allowed to pay a reduced rate of National Insurance.
Those who contracted out were typically workers in a finalsalary pension. But in the late 1980s and earlier 1990s workers were also encouraged by the Government to contract out of the state second pension and instead put money they saved on National Insurance contributions in a private scheme.
The latest revelations follow the publication of a Freedom of Information by the Department for Work and Pensions.
They show that when someone retires under the new rules the Government will make an adjustment for the extra pension these workers are assumed to have built up privately or in a final-salary scheme.
As a result, they will not be able to claim the flat-rate payout of £151.25. Instead they are likely to be left with a weekly retirement income equivalent to the basic state pension of £115.95. Essentially, they’ll see no benefit whatsoever from the new deal. This is because under the new state pension anyone who retires from April 6 2016 will get either what they would be entitled to with the current system, or the new system – whichever is higher.
The only people who are likely to claim the full amount in the first few years will have had to have worked for 35 years and never been contracted out.
Paul Green, of Saga, said: ‘The Government marketed flat-rate pensions with too much hype and not enough sense. This is absolutely a lesson in how not to manage expectations.’
The Government says those having money cut from flat pensions will reduce over time as the amount of workers in final salary schemes dwindles. But by 2020, thousands of workers a year will still face deductions of up to £40 a week if they contracted out. And by 2030, workers in the same situation would lose about £15 a week.
A DWP spokesman said: ‘The pension will remain contributory in nature. Therefore, people who paid less NI will see this reflected in their pension, just as they do in the current system.’
‘Too much hype and not enough sense’