Why is our pension being cut?

By THIS IS MONEY
Updated:

 

MY husband has his retirement pension plus two small private pensions. However each time he receives an increase in his state pension he is stopped virtually all of this via one of his private pensions. Can you explain why this keeps happening. KB, Cheshire

Des Hamilton, technical director at the Pensions Advisory Service, replies: There is a problem that I have come across which is affecting more and more people and I think this may be what you are experiencing. It is a fairly technical issue but I will try to explain it the best I can.

Your state pension is in two parts - the basic old age pension and the State Second Pension(S2P), previously known as Serps. Both these pensions are meant to rise each year in line with the Retail Price Index.

The problem arises with the S2P. This part of the state provision was first introduced in April 1978. Unlike the basic old age pension you could choose not to participate in this new additional pension through a process known as 'contracting out'.

You could only contract out if you were in a company scheme. Part of the pension arising from the company scheme was deemed to stand in lieu of the S2P. It was a replacement pension and was called the guaranteed minimum pension (GMP).

However, most people's employment experience involves moving jobs and this can mean that you have periods of being contracted in and periods of being contracted out.

At state retirement age, the state calculates your S2P as if you were never contracted out. They then add up the GMPs and pay you the balance, if any.

Even though you may not have been contracted out for all of your working life since 1978, you can still find that the total GMPs exceeds the S2P and so you may get nothing for the period or period for which you were contracted in even though you were paying full NI contributions to the state.

This also means that each year you are notified of the annual increases due on your S2P but these are not paid until your S2P plus increases overtake your total GMPs.

We have been getting a number of complaints from people affected in this way. Unfortunately there is nothing that can be done as it is in accordance with the rules governing the operation of S2P.

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