Wealth Management

State Pension underpaid by £1 billion

A damning report was published by the House of Commons Public Accounts Committee.

The Key Findings were:

1) The Department for Work & Pensions (DWP) estimates that it underpaid 134,000 pensioners over £1 billion, with some of the errors dating as far back as 1985

2) It’s difficult for pensioners potentially affected to know what to do. The DWP has set little guidance for people who are concerned that they have been underpaid and has left people in the dark over their entitlement

3) They are prioritising living pensioners, there is currently no formal plan for contacting the next of kin where the pensioner is now deceased

4) The DWP also admits that many other pensioners are underclaiming their State Pension and need to contact them to receive an uplift to their payments. These pensioners need clearer information to act, or risk missing out on significant sums.

It’s hoped that this report will force the DWP to act to correct past mistakes and provide clearer information for future pensioners. We wrote last year showcasing an article by Steve Webb, former pensions minister and now a partner at the actuaries LCP which highlighted the benefit and things to watch with the State Pension.

The Value of the State Pension

From April, the new ‘flat rate’ state pension is typically worth £185.15 per week and is indexed each year on a generous basis. Based on current rates for index-linked annuities, if you had to buy that level of income yourself it would cost you well over £300,000 of pension wealth. Making the most of the state pension for you and your spouse could make a material difference to your retirement prospects.

The State Pension is Automatic

At first glance, you could be forgiven for thinking there isn’t much to go wrong with the system. You work, pay your National Insurance and receive whatever state pension the system pays out. In the world of the new flat rate state pension, that amount will often be the standard amount.

It turns out however that there are several areas requiring some attention to make the most of the state pension.

21st January 2022

Things to watch out for

The first place to start is the ‘old’ state pension system, for those who reached pension age before 6 April 2016. This is a more complex system than the new flat rate pension, but this complexity means things can go wrong and opportunities can be missed.

The Government has already admitted that nearly 200,000 women had been getting the wrong rate of state pension for years, and will have to find nearly £3bn to put things right.

But even though the DWP has said it will check its records to find underpayments and send out cheques, there are plenty of people on the old system who could get more but who will not be picked up by DWP’s trawl.

Married Women

The first group is married women whose husbands turned 65 before 17 March 2008.  These women can get a 60 per cent ‘married woman’s pension’ when their husband turns 65. But unlike women whose husbands turns 65 after 17 March 2008 (who should get the uplift automatically), these women have to put in a claim for it. To this day, there are tens of thousands of married women with husbands now in their late 70s or beyond who have never claimed the full pension they are due.

Divorced Women

A second group is women who divorce after reaching state pension age. A post-retirement divorcee can use her ex-husband’s entire NI record instead of her own and often this will boost her basic state pension to the maximum rate. But this only happens if she reports the divorce to the DWP.

Widows and Widowers

A third group, straddling both old and new state pension system, is widows and widowers. While the DWP has accepted there are tens of thousands of widows whose pension was never reassessed when their husband died, and have said they will track them down, they may not find them all. In particular, although the new state pension has more limited rights for ‘survivors’, they do still exist. So, it is worth checking that the more recently retired are getting something from a late husband or wife.

Over 80’s

Another little-known corner of the system is the non-contributory state pension for the over 80s. Anyone aged 80 or over can get a pension currently worth £82.45 per week regardless of their NI record provided they satisfy a basic residence test. But in some cases they need to put in a claim, so it is worth checking.

State Pension Choices

Finally, there are some choices people can make which can help maximise their state pension.

One is the decision about when to take it. Although the reward for state pension deferral has been reduced, for those who plan to work past state pension age which is currently the age of 66, it can make a lot of sense from a tax point of view to consider delaying taking it.

For those who are short of the contributions necessary to receive the maximum new flat rate pension, there is the option to top up by paying voluntary NICs. The rate of these contributions is heavily subsidised by the Government and can represent excellent value. While you have to be careful to top up the right years, getting this right can be a highly effective way for you to invest spare capital.

Usually, it’s only possible to fill NIC gaps in the previous 6 years, with the deadline falling on 5th April.

The current cost of paying for this year’s missing NIC is £800.80 but is a slightly lower amount for previous years. This gives an extra £275.08 of index linked pension each year.

In addition, if you are a man born after 5 April 1951 or a woman born after 5 April 1953, you can pay voluntary contributions by 5 April 2023 to make up for gaps between 6 April 2006 and 5 April 2016. You will pay the current rate of £800.80 for a year.

The often-neglected state pension is actually of huge value. If you think you may have scope to claim additional state pension benefits, please speak to your Old Mill Financial Planner, or alternatively click here…