Thousands of people’s later life plans put in jeopardy

Two thirds of people reaching retirement age next year will receive less than the full flat rate pension, reveals a Freedom of Information (FOI) request submitted by the Sunday Times.

Whilst many people approaching retirement are speculating on receiving a weekly payment of £148, it is expected that only 37% will actually benefit from this larger payment. The announcement that just 222,000 of a possible 600,000 will receive the full amount will come as a significant blow, as the Government originally announced that anyone who had made 35 years of National Insurance (NI) contributions would qualify for the full amount.

According to the Department for Work and Pensions, the problem arises where people have paid lower NI contributions during their careers. Many employees were given the option of contracting out of the secondary state pension in order pay into an occupational scheme – this is where the shortfall arises.

Additional problems arise for women who may have taken a career break due to caring responsibilities and haven’t accrued 35 years of NI payments. However, they may be able to apply for credits during the time they were caring for family members or buy additional years of contribution.

Letters are being prepared to advise people who are close to retirement of the situation based on their National Insurance payment calculations. A document published by the Department for Work and Pensions suggests most people who reach the state pension age within the next two years will have paid lower contributions at some point.

Malcolm McLean, of pension consultancy firm Barnett Waddingham, suggested that the public were currently misinformed about their state pension entitlement.

He said, “The fact sheet…illustrates the mind-blowing complexity of the arrangements being put in place. It also gives lie to the claims made originally by ministers that the new system would produce a more generous simpler flat-rate state pension for millions of new pensioners going forward. None of these claims appear to be true, at least in the short term.”

He also suggested that it would be advisable for the Government to automatically send a state pension forecast when people reach 55.

A calculation will be made that estimates how much somebody has managed to accrue in their personal savings and a deduction from the full entitlement will be made accordingly. However this calculation has been widely criticised; whilst some people may have an additional pension which will make up for the shortfall, other individuals may have only paid minimal amounts into personal pensions and will receive no more than a couple of hundred pounds per annum.

Employees will not be given the option to work longer in order to make up for lower NI payments. Neither will they be allowed to buy additional years. Over a period of time the number of people who will qualify for the full state pension will rise, and in a few years nearly half of all pensioners will qualify.

Unfortunately some individuals will still pay the price for making a decision that had unexpected consequences.