Millions of older people up and down the country are completely reliant on the State Pension.
It’s not exactly enough to lead to a life of luxury in your old age though, with the new State Pension paying a maximum of £168.60 a week and the basic state pension paying a maximum of £129.20.
What’s more, some older people are seeing their State Pension payments reduced, and it’s all down to a service launched by the taxman.
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Contracting out
Between the late 1970s and the early 2000s, taxpayers could make use of a second State Pension, what was essentially a top-up service, called the State Earnings Related Pension Scheme (SERPS).
However, you could opt out of this, or ‘contract out’. The idea was that you would cut the National Insurance payments that both you and your employer would make, and instead save into an occupational pension scheme.
In effect, you traded a lower State Pension for a beefier personal pension.
Employers then had to promise that the larger personal pension that their staff received through contracting out would at least be the same as what they would have got if they had remained in the SERPS.
The authorities didn’t want people losing out through contracting out.
This was called the guaranteed minimum pension.
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‘Reconciling’ the data
This is where things get a bit tricky. HMRC is supposed to hold data on anyone who has one of these guaranteed minimum pensions so that they can use this to amend the State Pension those people receive once they hit retirement.
The trouble is that that data is liable to have an awful lot of holes in it, meaning some people are receiving a larger State Pension than they should, while others are getting less.
In a bid to rectify the situation, in 2016 HMRC launched a reconciliation service, giving employers and pension schemes a two-year window in which to get the data up to date and matching up.
That reconciliation service finished in December 2018, and the effects are starting to be felt.
I’ve been getting too much!
Because of some dodgy record keeping, those guaranteed minimum pensions have not been reflected in deductions to the State Pensions of a decent number of people.
As a result, they have been overpaid, in some cases by many thousands of pounds.
The good news is that the taxman is not asking these pensioners to hand the money back. After all, there’s no suggestion that they did anything wrong.
However, these pensioners are going to see their State Pension cut to the correct level.
Steve Webb, the former pensions minister who is now director of policy at Royal London, has warned that this could impact tens of thousands of people.
The government will contact you if you’ve been overpaid, to explain the situation and how your ongoing pension will be affected. If you have been underpaid, then you will receive the money you’re owed, though this won’t include interest.
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What State Pension am I likely to get?
Thanks to the complexities involved with guaranteed minimum pensions, it’s nigh on impossible for normal people to work out whether they may have been receiving too large a State Pension in the past.
However, for the rest of us, it is a good idea to get some insight into what sort of State Pension we are likely to receive.
Your eventual State Pension will be based on how many qualifying years of national insurance payments you have on your record.
You can get a forecast through the government’s website. Not only will this tell you how much you are on course to receive, it will also explain when you can get it, and what options you may have for increasing the size of those payments.
Next, read our complete guide to pensions.