Confusing system sees OAPs lose out on state pension

News


11 May, 2017

Confusing system sees OAPs lose out on state pension

The UK Government has come under stern criticism for leaving pensioners in the dark about why some are not receiving their full 'flat rate' state pension.

Reforms introduced in April 2016 (pre-Brexit) fixed the state pension rate at £159.55 a week. The new flat rate state pension is available to anyone who has built up 35 qualifying years' worth of National Insurance credits.

However, despite this, government figures state that up to 90,000 old age pensioners were denied the full state pension within the first five months of the new scheme being introduced. In fact, within the first year, an estimated 200,000 people failed to receive their full ‘flat rate’ state pension, despite having worked all their lives.

According to Elizabeth Anderson from Inews, this is due to many pensioners being contracted out, oftentimes without their knowledge. "This meant they paid a reduced rate of national insurance in exchange for a lower state pension", she writes.

The contracting-out system was first put in place way back in 1978. After going through several changes and reforms, it began being phased out in 2012 before being abolished completely last year when the new state pension reforms were introduced.

However, during that interim period (until April 2016), the state pension had two tiers: a basic state pension and an additional pension. People who had contracted out lost or gave up part of their entitlement to the additional pension.

This means that, prior to retirement, workers were paying a reduced rate of national insurance in exchange for a lower state pension. Therefore, those who were "contracted out" will receive a lower full state pension to reflect the period they paid lower levels of national insurance.

However, many employers' opted people into contracting out schemes automatically, as it reduced their national insurance bill. The side-effects of this meant that many employees were "contracted out" without even being aware of it.

Those whose pension was "contracted out" were offered a 1.4% rebate by the Government if they put savings destined for the second state pension in a separate pot – either a company or private pension plan.

When "contracting out" was abolished last year, the national insurance rebates stopped. The Department for Work and Pensions (DWP) said that, despite the confusion, no one would be losing out.

However, the DWP estimates that it will take another 20 years until 85% of people reaching the state pension age will get the full amount they deserve.

Currently, the state pension age stands at 65. In October 2026, the pension age will rise to 66 and to 67 between 2026 and 2028. Another review of the state pension age was recently delayed ahead of the general election on 8 June.

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