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“I paid NI for 45 years so don’t I get a full state pension” – Steve Webb replies

PENSION POT
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I have 45 years of National Insurance contributions but have been advised I was contracted out for four years.

Consequently, I will receive a reduced pension, reduced by £20 per week.

I have no idea when my contributions were contracted out and have been advised by HMRC that this period of contracting out should provide me with £20 per week.

Can I request a further review of my pension forecast and how can I discover who is the provider of the £20 per week. I’m 66 in June.

Steve Webb replies: The issue of deductions from your state pension for periods of past ‘contracting out’ is probably the most frequent question in my weekly mailbag.

I’ve explained the general idea of a deduction for past ‘contracting out’ in a previous column: Why won’t I get a full state pension even though I paid National Insurance for 38 years?

I’ll focus this time round on how you can find the private pension you are supposed to be getting instead.

The answer to your question depends on the type of private pension of which you were a member.

Let’s start with traditional salary-related ‘defined benefit’ pensions.

A condition for a DB scheme being allowed to contract out of part of the state scheme is that it had to provide benefits at least as good as you would have received if you stayed fully in the state scheme.

Between 1978 and 1997 this promise was known as a ‘Guaranteed Minimum Pension’ or GMP. After 1997 the rules worked slightly differently but the basic idea was the same.

Instead of building up rights under the state earnings-related pension scheme (SERPS) you built up a company pension and, at retirement, you get money from that scheme instead of part of your state pension.

In terms of tracking that money down, when you reach scheme retirement age they should contact you and then start to pay a pension in line with the scheme rules.

The amount of this pension should be equal to – or often more than – the amount that has been knocked off your state pension.

I am guessing however that you would probably remember if you had worked for a company that had a DB pension scheme, so it may be that you had a different sort of pension.

The alternative type of pension is a ‘pot of money’ or ‘defined contribution’ plan.

With a workplace occupational DC scheme your contributions (if any) plus those of your employer get added to a pot of money which is invested and grows over time.

Another common type of DC arrangement promoted actively in the late 1980s and early 1990s was a ‘personal pension’.

In some cases you didn’t even have to put your own money into a personal pension – it was simply topped up by the Government in the form of ‘National Insurance rebates’ payable because you were contracted out.

These were known as ‘rebates only’ personal pensions and I can see why you may have less memory of a pension like this as you were not actually contributing to it.

Once you are over 55 you can access a DC pension in a variety of ways, including, for example, using the pot to buy an annuity or an income for life.

However, the crucial point is that there is no guarantee that the pension you get from this DC arrangement exactly matches what has been knocked off your state pension.

The reason for this is that, when you contracted out years ago, the level of the National Insurance reductions which you enjoyed was based on an estimate of the investment return those rebates would achieve and the annuity rate you could expect at retirement.

But things have not turned out since then as expected.

In many cases, the money that went into your DC pension pot in the 1980s or 1990s grew relatively well. But people reaching pension age since the global financial crash of 2008 have generally faced very low interest rates and annuity rates.

As a result of this, the pension you actually get from your DC savings can end up being less than was anticipated.

In summary, with a DC pension, there is no particular reason to expect the amount knocked off your state pension to precisely match the amount of annuity you can now get with your DC pot – indeed it would be quite surprising if it did.

I would hope that if you had a DC pension of this sort, often provided by a household name insurance company, you would have some paperwork such as annual statements.

If you have absolutely no pension paperwork, and don’t remember being in a pension scheme at all, there is one further possibility. This is that you paid in to a pension for a limited period of time but then cashed out.

In the past there were various rules which allowed people to reclaim their contributions if they only paid in for a couple of years. And it’s possible that you did reclaim your contributions several decades ago but have now completely forgotten.

In this case there is still a deduction from your state pension, reflecting your lower rate of NI contributions years ago, but there may no longer be any pension to match that contribution.

It is to be hoped that when the pensions dashboard finally goes live people will find that they can easily track down all of their past pensions on a single website. However, we are probably a couple of years away from being able to access dashboards and I imagine you would like an answer sooner than that.

So, if this is still a complete mystery, HM Revenue and Customs should be able to tell you the name of the scheme (or schemes) into which you were contracted out.

You can then contact them to find out if you still have any rights in the scheme. Do let me know how you get on.

If you would like to ask Steve a question about pensions, please email him at pensionquestions@thisismoney.co.uk.
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