People are continually annoyed and frustrated that they aren’t getting the amount of state pension they were anticipating, and they struggle to get a simple answer as to why.
When Eric, 66, from Middlesbrough, went to claim his state pension last year he was horrified to discover he was going to get £40 less than the £168.60 a week full state pension, that’s £2,000 a year less or £41,600 over a typical 20-year retirement.
He contacted the Department for Work and Pensions to ask for an explanation regarding his low pension and couldn’t understand the gibberish he got sent, an eight-page document that made no sense to him.
Eric had reviewed his state pension entitlement about 10 years before retirement, thinking that if he needed to do anything to increase it he would have the opportunity to sort it out before he retired.
He was told he was on course for a full state pension, but he knows now that he should have reviewed it again, but then hindsight is a wonderful thing, and last year when Eric went to claim his state pension he was informed he had 33 years of full National Insurance contributions, two years short of the 35 years required to get the full amount.
He was told he could pay for those two missing years, but he would still not be guaranteed to get the full amount.
There was loads of toing and froing and he got more perplexed, so gave up, and was informed he was due £127 each week but was a tad miffed as to why two years National Insurance contributions could make that much difference, cutting his pension by nearly a quarter.
So, Eric went on a mission to try and find out why he was so much worse off. He questioned why and no one appeared to be able to resolve it, so he requested a written explanation. That’s when an eight-page document thumped through his letterbox and then he got completely confused.
The state pension system is a minefield. It’s virtually impervious and there are only a few people outside of the DWP who actually know how it works, and you really do need a stiff drink to get through it.
It all comes down to two things, and the most significant impact is for what seems to be seven years when Eric was contracted out of the state pension. So, for those seven years, he wasn’t building up the rights to the state pension but was building up additional pension benefits in workplace pensions.
Eric would have been paying a lower amount of National Insurance as a consequence, but equally significant would have been building up an extra pension in workplace schemes, and these additional amounts would be part of the amount he now gets in private pension income.
Numerous people don’t make the connection between periods of contracting out and higher private pension benefits, and while they get less in state pension it’s not clear how this amount is made up from private/workplace pension income.
The two incomplete years of National Insurance records, which could be down to periods of not working a complete year, and not claiming unemployment benefits which would automatically mean National Insurance credits were made would have reduced his state pension further.
You need a full 12 months of National Insurance to record one year under the rules, anything less won’t count towards your state pension, and these factors combined, via some complex DWP calculations, reduced Eric’s state pension by about £40 a week.
The problems really arose from the fact that we’re working with two systems, pre and post-April 2016, with most people retiring today having built up benefits under both systems, and at some point in the past, numerous people would have had periods of contracting out, which was popular in the ’80s and ’90s, and they may have been unaware this had occurred.
Figures show at its peak, more than five million people had opted out of the additional state pension through contracting out, but this practice stopped with the start of the new flat-rate system in April 2016.
Contracting out helped to boost private pensions but on the flip side reduced state pension income, and many people forgot when or if they had periods of contracting out, but pension forecasts show these numbers as a Contracted Out Protected Equivalent.
The state pension is the foundation of most people’s retirement income plans, and it’s an especially valuable benefit, and if you had to buy the equivalent of the full state pension using your own pension funds it would cost you about £277,000.
Over the last few years, and in an attempt to simplify and make the system better for all, the Government launched a new flat-rate pension in April 2016, but this has actually created additional complexity and chaos.
So, where does this leave you if you’re seeking to work out how much you are expected to get? Well, not in a great position if this post is anything to go by, and under the old state pension, it was possible to be contracted out of additional state pension, as a result, people paid less National Insurance and were also contributing to an occupational pension meaning the large preponderance benefited.
But the state pension age is rising today for millions of people, possibly costing them thousands of pounds, and under plans set out by the coalition Government in 2011, people born after 5 December 1953 will see their state pension age rise as elements of reforms appear to be designed to cut billions from the UK’s welfare bill.
The state pension age for men and women will slowly rise from 65 to 66 from now until 6 October 2020. The state pension age is then expected to rise to 67 by 2028 and 68 by 2039, and you will be expected to work until you drop.
It’s the first state pension increase for men since the modern system was launched in 1948, and as the increase is being introduced bit by bit, people will encounter different state pension ages depending on when they were born.
Anyone born from 6 December 1953 to 5 January 1954 will have a state pension age of 6 March 2019, meaning some have to wait up to three months longer to begin getting the payment.
Those born later will see a greater increase depending on their date of birth. This suggests that a three-month rise in the state pension age could cost someone over £2,000 in retirement income, while those who have to wait a full year longer could miss out on over £8,000 state pension.
This could have a notable impact on people’s finances, and a state pension age increase presumably isn’t what most people asked for in their Christmas stocking, but that will be the actuality for countless people who are about to turn 65.
And while this might feel like a cruel lottery for those immediately affected, younger generations will need to prepare for increases in the state pension age to 67 and 68, and if life expectancy continues its long-time trend upwards, then a state pension age 70 could well be on the cards.
And when it comes to younger people, the clear signal coming from the state is that if you want security in retirement, you’ll need to provide it for yourself.