State pension forecasts could be inaccurate

News


21 Feb, 2017

State pension forecasts could be inaccurate

Out of date information means over five million people could have received inaccurate state pension forecasts from the Department for Work and Pensions.

The DWP implemented the state pension forecasting tool last year following the launch of the new state pension in April 2016. However, The Sunday Times has since found that the system is providing inaccurate and conflicting forecasts.

The online pension forecast predicts an individual’s likely state pension income based on several factors such as their national insurance contribution (NIC) history and private pension entitlement.

Notably, many people who contributed to private sector schemes will have contracted out, which means they will have paid lower rates of NICs in return for larger payments from their private scheme. When it comes to calculating state pension, those who have contracted out will normally find their state pension entitlement will be reduced.

The problem with forecasts, the paper discovered, related to those who had defined benefit schemes. The DWP’s tool has in some cases been using incorrect rates to work out the contracted out pension a person is due to receive.

Contracted out DB schemes were required to provide a guaranteed minimum pension (GMP) payment from the contracted out element to each member.

For any member who left the scheme, a set rate was applied to re-evaluate this amount each year up until retirement age.

When speaking to The Sunday Times, HMRC said: “Pension scheme administrators are responsible for their records. The Scheme Reconciliation Service is a voluntary service offered by HMRC to help pension schemes put their records in order using information held on an individual’s national insurance record. We are working flat out to action all guaranteed minimum pension reconciliation requests as quickly as possible so pension companies can get their records up to date”.

The DWP said: “A digital statement provides an estimate of what a person is likely to receive from the state pension based on the information provided by HM Revenue & Customs (HMRC) at the time of their request. If their national insurance record is then updated, the amount will change to reflect this”.

Last year, there was a one-off deduction for past contracting out – known as a ‘rebate derived amount’ (RDA). This figure will be used when calculating pension rights built up by 2016 – the so-called ‘starting amount’ for the new state pension.

However, any years of contributions post 2016 add to this starting amount and build it up towards the full flat rate. People can work off this deduction by making voluntary contributions or by working.

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