There aren’t many pension issues that Sir Steve Webb hasn’t tackled. For the past ten years he has answered your questions about pensions in a weekly column for Wealth & Personal Finance’s sister website, For the past ten years he has answered your questions about pensions in a weekly column for Wealth & Personal Finance’s sister website, This Is Money.
The former pensions minister, who now works for the LCP consultancy, has guided readers through the thorniest of issues, from unpicking outdated rules on the state pension to breaking down complicated tax queries. He’s explained the impact of rule -tinkering by governments and cut through the notorious complexity of pensions with common sense answers.
To mark the anniversary, Sir Steve has compiled answers to the questions our readers most frequently ask.
State pensions
As a concept, the state pension is very straightforward. But in practice, the rules around how much you will receive, and when, are fiendishly complicated.
Unfortunately, the information on Government websites about state pensions can be patchy at best.
Every week I receive a deluge of questions about the state pension.
As the architect of many of the new rules surrounding the state pension, I can offer a guiding hand.
Why don’t I get a full pension when I’ve paid in for 40 years?
There are two types of state pension. Anyone who reached state pension age before April 2016 receives the old state pension, which pays a basic pension of up to £176.45 a week or £9,175.40 a year. It also includes an earnings-related top-up, often called Serps – the state earnings-related pension scheme.
Younger pensioners who have reached pension age since April 2016 are on the new state pension, and the standard rate is £230.25 a week – £11,973 a year.
Under the new state pension, it’s often said that you need 35 years of National Insurance (NI) contributions to get a full pension. But there are people who have paid in far more than this who still don’t get the full amount.
This is because for some of those years, they were paying NI at a reduced rate under a system known as ‘contracting out’. In those years they were saving into a workplace pension alongside the state pension and were allowed to pay less NI – a ‘contracted out’ rate.
When their state pension is calculated, a deduction is made for those years, which can leave them short of the full rate.
The good news is that those who keep on paying NI post 2016 can gradually ‘burn off’ that deduction and build back up to the full rate, in addition to their private pension. This is because the newer, full years of contributions reduce the impact of the ‘contracted out’ years on their record. But those who reached pension age soon after the rules changed in 2016 didn’t have time to do this.
This means they receive a smaller sum from the state, but should get a larger sum from their workplace pensions.
Overall, they should be no worse off and some may be much better off thanks to the growth of their company pension plans over time.
How much of my late husband’s state pension will I inherit?
Under the old state pension system, which applies to those who reached pension age (currently 66) before April 2016, married women often reached pension age with a poor pension but got an increase if they were widowed.
Under this system, a woman who lost her husband would see her basic state pension boosted – often to the maximum rate – as she would inherit part of her late husband’s contributions.
This was done by adding together the husband and wife’s contributions, which typically gave the widow a 100 per cent record. In addition, if her husband had built up rights under Serps, she would inherit at least 50 per cent of this, and potentially more if her husband was born before October 1945.
From 1978 onwards, anyone on the old state pension who wasn’t paying in to a workplace pension also built up entitlement to Serps – the earnings-related element of the state pension. Those who did so now receive this extra pension, on top of their basic payment.
Some Serps payments are just a few pounds extra. But others could be receiving as much as the full basic pension of £176.45 plus a maximum Serps pension of £222.10 a week.
The new state pension works differently and has very little provision for widows. The new system aims to generate good pensions at retirement for both men and women in their own right, but has very little step-up following the death of a spouse.
In principle, the Department for Work and Pensions should do all these calculations automatically and increase payments where necessary. But in writing my weekly column I discovered that large numbers of widows were missing out. As a result, DWP had to pay nearly half a billion pounds in arrears to more than 50,000 widows who had been underpaid.
The DWP should have picked up all the errors by now, but if you were widowed and your state pension didn’t change, it’s worth getting this checked out.
Will there be a state pension in the future?
The state pension costs £146 billion a year, and the bill is rising rapidly. This is because of a combination of a rising pensioner population and the relatively generous ‘triple-lock’ formula, which guarantees payments rise by inflation, wage growth or 2.5 per cent – whichever is highest.
Alongside the other costs of an ageing population, future governments will be looking to make savings on state pensions.
But I doubt that a future government would take the state pension away altogether.
Many people rely heavily on the state pension, and it forms the bedrock of their retirement plans. If it were to be scaled back, there would be a massive political outcry, and any change would have to be phased in very gradually.
It is more likely that governments will seek to cut costs in other ways. This will include further increases in the state pension age and by scrapping the triple lock.
When can I claim it?
Recent changes to state pension age have been hugely contentious. But governments around the world continue to increase pension ages, and we are no exception.
In the UK, state pension age will increase gradually from 66 to 67, between April 2026 and April 2028.
So, for example, those born in April 1960 will retire at 66 and one month, those born in May 1960 will retire at 66 and two months, and so on. A further increase to age 68 is already on the cards but there could be more down the line.
There is currently an ongoing Government review of state pension age, and younger workers may have to wait until they are 69 or 70 before they qualify.
You can check your state pension age by entering your date of birth on the Government website (gov.uk).
Is it worth topping up?
You may come up short of a full state pension if you have gaps in your NI record.
Under the new state pension you need 35 years of contributions, and you can pay to make voluntary top-ups to fill any gaps from the past six years.
Topping up remains excellent value for money for most people. How much you will have to pay depends on the rate charged in those years.
Filling one year currently costs £923 and typically adds around £342 per year to your state pension. Even after tax, most people would make their money back within four years and would be in profit afterwards.
Over 20 years they would receive an extra £6,840 in state pension payments – without including annual increases.
The main exceptions are people on benefits (whose benefit might be cut if their pension went up) and those who may not live long enough to get their money back.
Topping up recent gaps will also help if your pension is short of the full rate because you were previously contracted out. You can top up even if you are now drawing a pension.
But you should check to make sure you are not missing out on free NI credits, such as for looking after grandchildren, before paying to fill a gap.
Check your forecast by contacting the Government’s Future Pension Centre on 0800 731 0175 if you are below 66, or the Pension Service for those above pension age on 0800 731 7898.
You can also access your forecast online at gov.uk.
It will tell you the date you can start claiming and give you a forecast of what you are set to receive.
You can also click through to see your full NI record. This will show you how many qualifying years you have and any missing or incomplete years.
Workplace pensions
More than 10 million employees have been building up a workplace pension pot on top of the state pension, thanks to a policy known as automatic enrolment.
Workers are signed up as long as they are over 22 and earning more than £10,000 a year.
But there are a lot of questions about how the system works.
I’ve lost track of a pension from a previous employer – how can I find it?
If your former employer is still in business, you can try contacting them directly for information.
If not, see if you can get in touch with former colleagues and ask them for contact details for the scheme.
You can also use the Government’s Pension Tracing Service, which provides useful contact details for you to follow up, at gov.uk.
But it is worth being aware that in years gone by you didn’t always end up with a pension on leaving a job. If you only paid into a pension for a few years, you may well have received a refund of your contributions when you left, and so there is no pension to find now.
If your pension was with an insurance company, they may have changed their name.
The website of the Association of British Insurers has a useful list of old insurance companies and what they are called now at abi.org.uk.
If you have paperwork showing the name of an insurer that doesn’t exist any more, your pension may now be with a new company which should hopefully have your pot.
I’ve brought together these and other tips in the LCP Guide To Finding Lost Pensions which can be found at lcp.com.
Should I merge all my pensions into one?
Moving from job to job can mean that you end up with lots of pension pots.
In principle, there’s a lot to be said for combining them in one place. By doing so, you can move your money out of old policies that may have high charges or poor investment performance and manage just one account. This should help you plan your retirement finances more efficiently.
But consolidation isn’t always the answer.
Some pension policies have valuable features, such as offering extra tax-free cash or letting you access your money early, and these could be lost if you move your money out.
Also, some businesses that specialise in pension consolidation may have less favourable terms than your current workplace pension. Make sure you don’t sign up to something inferior just because it is more convenient.
Will the tax-free lump sums be scrapped?
Every year there is a worry that the chancellor in power will scrap the rule that allows you to take the first 25 per cent of your pension free of tax.
However, as I wrote before the last Budget, such a change was always highly unlikely. Now that well over ten million people have a workplace pension with the right to take tax-free cash, it would be political suicide to take that away.
A lower cap on lifetime tax-free cash could be introduced, but even that more modest change has been seen as a step too far by previous governments.
Why do public sector workers get such generous pensions?
Most workers in the private sector are building up a pension pot to support themselves.
But in the public sector, pension arrangements are typically different. Most nurses, teachers and civil servants are building up a guaranteed pension, linked to their earnings and service.
In a private sector pension, all the risks of market fluctuations – and even living too long – have to be borne by the individual. This is because they make contributions into their own personal pot of money that is invested, and have no guarantees on the amount of income they will be able to draw in retirement.
The responsibility for turning a pension plan into retirement income falls on the individual, rather than the company for whom they work. By contrast, public sector pensions are guaranteed to pay out for life, increasing annually with inflation.
Public sector pensions have seen considerable change in recent years. Typical pension ages have increased sharply (now linked to state pension age), and annual inflation increases are now less generous.
Guaranteed pensions of this sort remain an attractive feature of working in the public sector, and are probably undervalued by many who will receive them.
Public sector workers also typically receive far larger employer contributions into their pensions.
In the private sector, workers must contribute at least 5 per cent of their annual salary to their pension under automatic enrolment rules. Employers are obliged to pay the equivalent of just 3 per cent of their staff’s salaries into these retirement funds each year.
Many will agree to pay above this minimum, typically at a rate of 5 to 8 per cent.
Those in the public sector contribute a higher proportion of their income into their pensions each year but are rewarded with large contributions from their employers. In the case of the Civil Service, for example, workers enjoy a bumper employer contribution of 28.97 per cent – nearly ten times the minimum required by private sector firms.
In the past, this generous pension was partly offset by lower pay levels in the public sector. But public sector pay has caught up, and average pay in the public and private sectors is now virtually identical (£739 per week in the private sector versus £731 in the public sector, according to the ONS).
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