The full new state pension is £179.60 a week, but even if you worked all your life your payment may be subject to deductions – which can be alarming.
The good news is there is often a clear explanation for this, and it’s all to do with the pension terms you agreed to during your working life.
In most cases it’s linked to ‘contracting out’ of the state pension – periods when individuals were members of a company or private pension which was meant to replace part of their state pension.
These deductions go by a variety of confusing names – CODs, COPEs and GMPs amongst others.
Contracting out via a salary-related pension in simple terms, meant workers and employers benefited from a reduced rate of NI contributions.
In return, the occupational pension scheme had to replace part of the state pension (the SERPS or earnings-related element) that the worker would otherwise have built up.
Between 1978 and 1997 the amount which the scheme had to provide instead of the SERPS pension was called a ‘guaranteed minimum pension’ or GMP.
Contracting out of personal pensions ran from 1988 to 2012 and worked in a different way.
The worker benefited from a rebate of NI contributions which was paid into a personal pension and invested. Whether the pension at retirement generated by that money was higher or lower than the state pension given up depended on things like the investment performance of the pot and annuity rates at retirement.
Most people in this kind of pension will have a deduction from their state pension which does not exactly match the private pension they built up in replacement; in some cases, the deduction will exceed the amount of private pension built up.
Although contracting out was abolished for salary-related pensions in April 2016, past contracting out is still reflected in calculations for the new state pension.
But those who have years of contributions from 2016/17 onwards can gradually ‘burn off’ the deductions for past contracting out; eventually they can built up a full new flat rate pension in addition to their contracted out pension.
But in the early years of the new scheme, deductions for past contracting out can still leave them short of the full flat rate, even if they have 35 or more years of NI contributions.
In the case of occupational pensions, the decision about contracting out or not was taken by the scheme, not each individual member.
This is why many people say they do not recall deciding whether or not to contract out – they simply joined a pension scheme which was run on a contracted out basis.
State pension forecasts now contain a ‘COPE’ figure – the contracted out pension equivalent; this is an indication from the government of the occupational or personal pension which the individual might be getting from a contracted out pension arrangement.
However, this is a ‘memorandum item’ and has already been used in the calculation of state pension.
There is no need for people to do additional calculations using the COPE when they receive their state pension statement.
LCP has a guide to help you understand how this impacts you and whether your pension is correct, here.
If you do have a pension shortfall, you may qualify for a top-up in the form of pension credits - see how to apply here.
Many women have also been paid the wrong state pension because of a DWP error - see if it affects you, here.
