A staggering 80 per cent of workers approaching retirement could miss out on the new style of pension when it is introduced in 2016 meaning some could be up to £2,000 worse off, an investigation has revealed.
Not only could changes to pensions see older workers be exempt from the full payout millions also face losing thousands of pounds in inflation-linked increases on company pensions.
The potential cuts have been uncovered from the small print of the new flat-rate pension terms.
A major pledge of the new pension was that everyone who had paid all their National Insurance contributions would be guaranteed to get £155 a week.
But the clauses in the small print mean those who expected to get the new £155 payout could get far less although not even the Government has calculated how much less.
Under the current system, these workers would qualify for the full basic state pension of £113.10 a week. But under the new regime they would have their payout reduced.
The problem affects employees, who, at some point in their working life, were members of a final-salary scheme.
Because these pensions were so generous, employees were allowed to opt-out of receiving extra benefits such as the State Second Pension.
In exchange, they were allowed to pay a reduced rate of National Insurance.
Now the Government has decided that because they paid lower contributions, these workers should lose some of their new state pension.
Malcolm McLean, a consultant from actuaries Barnett Waddingham, warns: “The new flat-rate pension is not a more generous scheme than the current state pension. Middle to higher earners will be worse off in the longer term.”
The current state pension of £113.10 is paid to everyone who has 30 years’ National Insurance contributions.
On top of this, workers can earn extra benefits, called the State Second Pension (which used to be called the State Earnings Related Pension, or Serps), which boosts their payout in retirement.
Historically, workers in final-salary schemes were opted out of these extra benefits by their employer because their company pension was so good.
This was known as ‘contracting out’. In return, though, they paid a lower rate of National Insurance of 10.6 per cent, instead of the normal 12 per cent.
Government figures show that four out of five older workers at some point contracted out in this way.
The level for the new pension has yet to be set, but it’s expected to be £155 a week when it starts in April 2016.
Just like the current pension, what you get is based on National Insurance contributions - though you’ll need 35 years instead of 30 to get the full payout.
In an attempt to make the system simpler, all additional benefits, such as the State Second Pension and Pension Credit, are being scrapped.
From April 2016 the Government will perform a complicated calculation to establish a ‘Foundation’ amount of state pension it thinks you are entitled to.
This is worked out from the years of basic state pension you’ve accrued, plus the amount of additional state pension earned.
If the figure is less than £155 a week, then the payout will be boosted to this amount for those with 35 years of contributions.
But the Government will then reduce a worker’s pension for every year they were contracted out, to reflect the lower National Insurance contributions that they paid in this period.
Officials have not said how much they will take away — leaving people who are just 23 months from retirement with no idea how much state pension they will receive.
Some may get only the basic state pension — currently £113.10 per week — leaving them with £2,000 a year less income than they may have expected and casting a shadow over their retirement planning.
However on top of this, private sector employees who were contracted out of Serps between 1978 and 1998, could face even further reductions to their pensions.
At that time, final-salary schemes had to provide a so-called guaranteed minimum pension that promised at least the same benefits as Serps.
The inflation increases on this guaranteed part of their pension were partly or wholly funded by the Government.
But for those retiring after April 5, 2016, the Government will no longer pay these increases.
Assuming someone started with a guaranteed pension of £100 a week, over a 20-year retirement, this person could be left £16,000 worse off.
This assumes their pension would have risen at a modest rate of inflation of 2.2 per cent.
The inflation changes are complex, but they mean that guaranteed minimum pension accumulated between 1978 and 1988 won’t increase at all in the future.
That earned between 1988 and 1997 may only receive part of any inflation increase.
But the Department for Work and Pensions has claimed it had never actually paid these inflation increases and the belief stems from ‘an over-simplification’.
But the Daily Mail, who led the investigation, obtained Government statements and leaflets published over many years which state time and time again that it does pay these inflation increases.
Pensions expert Ros Altmann said: “When people contracted out they knew they were giving up rights to an additional state pension.
“But now the rules are being retrospectively changed to remove inflation protection, decades after they made the decision — and, in some cases, not long before they retire.”
Not only this but the Government is also ending a National Insurance rebate — worth 3.4 per cent — for employers who ran final- salary schemes.
In return, these schemes will be allowed to cut benefits or increase employee contributions without consulting their trustees. Employees in these schemes will see their National Insurance increase by an average £23 per week in 2016 as they start to pay the full 12 per cent rate.
Any change to their occupational pension would be a double blow.
Public sector employees will pay more National Insurance, but are protected from changes to their pensions for 25 years under a deal struck with the Government.
In response to questions about how the new flat-rate pension will be implemented, the Department for Work and Pensions confirmed that some workers will be denied the full £155 a week payment.
In a statement, it said: “It is therefore possible that someone might have 35 qualifying years when the new state pension is implemented and not receive the full single-tier amount.”
It promises the results of its calculations showing how much state pension people will be able to claim will be available later in the summer for those whose retirement is imminent.