Readers are constantly contacting us, angry and disappointed they don’t receive the amount of state pension they were expecting.
They tell us they struggle to get a simple explanation as to why.
No wonder if the experience of one reader is anything to go by.
When Eric, 66, from Middlesbrough, went to claim his state pension last year he was shocked to find 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 believe the gobbledygook he got sent – an eight-page document that made no sense to him.
“I’d checked my state pension entitlement about 10 years before retirement, thinking if I needed to do anything to boost it I would have time to sort it out before I retired. I was informed I was on track for a full state pension. I know now I should have checked again nearer my retirement – but hindsight is a wonderful thing,” Eric said.
Last year when Eric went to claim his state pension he was told he had 33 years of full National Insurance contributions, two years short of the 35 years needed to get the full amount.
“I was told I could pay for those two missing years, but I would still not be guaranteed to get the full amount. There was lots of toing and froing and I got more confused, so gave up. I was told I was due £127 each week. I was a bit miffed as to why two years’ National Insurance contributions could make that much difference – chopping my pension by almost a quarter,” he said.
Eric went on a mission to try and find out why he was so much worse off.
“I asked why and no one seemed to be able to explain it so I asked for a written explanation. That’s when an eight-page document thumped through my letterbox and I got totally bamboozled.
“I took it down the pub to see if any of my mates could make sense of it. They all thought it was a joke.”
Eric sent me a copy of the document and to be truthful I’d rather he hadn’t. He asked if I could make sense of it. It was just page after page of endless numbers and complicated calculations, with terms I’d never heard of. I had no idea what it meant.
After a lie down and a stiff drink, I had to call in a pensions expert from Canada Life to help me.
It took him a few hours (and a stiff drink) to get to the bottom of it.
Andrew Tully, technical director, Canada Life explained: “The state pension system is a minefield. It is almost impenetrable and there are only a few people outside of the DWP who really understand how it all works.
“Years of tinkering and the introduction of the flat-rate system, with all the best intentions, have only added to the levels of complexity.”
Andrew said it all comes down to 2 things
- The biggest effect is for what appears to be seven years when Eric was contracted out of the state pension.
So for these seven years, he wasn’t building up 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 result, but equally important would have been building up extra pension in workplace schemes.
These additional amounts will be part of the amount he now receives in private pension income.
Many people don’t make the link between periods of contracting out and higher private pension values – while they get less in state pension it is not obvious 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 NI credits were made) will reduce his state pension further.
You need a full 12 months of NI to record one year under the rules. Anything less won’t count towards your state pension.
These factors combined, via some complicated DWP calculations, to reduce Eric’s state pension by around £40 a week.
“The issues really stem from the fact that we are working with two systems, pre and post April 2016, with most people retiring today having built up benefits under both systems,” Andrew added.
“And at some point in the past, many people will have periods of contracting out, which was popular in the 80s and 90s, and they may have been unaware this had happened.
“Figures show at its peak, more than five million people had opted out of the additional state pension through contracting out, but this practice ended with the introduction of the new flat-rate system in April 2016.
“Contracting out served to boost private pensions but on the flip side reduced state pension income. People can forget when or if they had periods of contracting out, but pension forecasts will show these numbers as a Contracted Out Protected Equivalent.”
The state pension is the foundation of most people’s retirement income plans.
It’s an incredibly valuable benefit – if you had to buy the equivalent of the full state pension using your own pension funds it would cost you around £277,000.
What about the new flat-rate pension?
Over the last few years, and in an attempt to simplify and make the system fairer for all, the Government introduced a new flat-rate pension in April 2016, but this has actually created further complexity and confusion.
The changes that have been made will take many decades to unwind, with experts telling me it could be 2051 before calculations become much simpler.
So where does this leave you if you are trying to work out how much you are likely to get?
Not in a great position if my burgeoning postbag is anything to go by. The Department for Work and Pensions says when someone challenges their state pension payments it is obliged to provide as much information as it can on their NI record which is used to calculate their state pension.
A spokesperson said: “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 vast majority benefited.
“Since we introduced the new state pension, most of those who were contracted out will receive a higher state pension than they previously would have done.”