Will you get the state pension you deserve?
Up to 18 million people may not receive their full entitlement. Make sure you're not one of them, says Neasa MacErlean
Saturday 02 April 2011
If we all knew the truth, as many as half of us might discover mistakes in our state pension entitlements and tax liabilities. The All-Party Parliamentary Group on Taxation (APPGT) estimates that the entitlements of nearly 18 million individuals have been understated. Last autumn's revelation that 6 million people have paid the wrong amount of tax has shaken faith in government systems. There are many other types of errors, including the sending out of incorrect tax codes by HM Revenue and Customs (HMRC) and basic mistakes by employers and people filling out their tax returns. It would be impossible to arrive at a precise figure for how many people could be affected by these mistakes, but it could come close to 30 million.
Ian Liddell-Grainger MP, founder and chair of the APPGT, is urging the Government to transform its tax systems so that individuals can access their tax and national insurance (NI) records just as they access online bank accounts. This way we could check individually to see if our NI contributions show up on our account each year and ensure that our state pension entitlement is not reduced because of an administrative error. While proposals for a £155-a-week universal state pension would reduce the impact of such errors, the Chancellor, George Osborne, said in the Budget that it will take "years fully to come into effect" and will not help current pensioners.
In the medium term, however, Mr Liddell-Grainger, Conservative MP for Bridgwater, is extremely concerned. "Potentially, about 18 million people could have the wrong pension or no pension," he says. "They could be one penny short or they could have zero." He fears for the pension infrastructure itself as well as the individual errors. "It will get to the stage where the system will be untenable," he says. Rather than opening up its systems to individual taxpayers, HMRC could deliver a worse service over the next few years, he fears. More staff cuts are expected on top of the 30 per cent reduction of the last seven years.
A serious problem now is that more than 9 million sets of NI annual contributions have not been matched up to the people who made them. The figure of 9 million relates only to the last seven years and HMRC admits that there are "almost certainly" other unmatched contributions for prior years. If those contributions remain unmatched forever then, depending on the individual circumstances, some people would end up receiving a smaller state pension than they should get. HMRC told The Independent that "practically all" of the 9 million relate to foreigners who worked briefly in the UK and would not be entitled to a UK state pension. But Mr Liddell-Grainger says: "That's a pretty weak excuse. I don't believe a word of that." Adam Marks, a researcher for the APPGT, concurs: "It mainly relates to low-paid people who switch jobs a lot."
The issue here is that people switching jobs often do not get their tax records updated quickly enough to ensure that their new employer has the correct information which can then be passed on to HMRC. Many individuals do not realise the damage they do to their own entitlements if they supply a wrong NI number. The NI number is the crucial identifier which HMRC uses to match people to their contributions. Karen Thomson, research head at the Chartered Institute of Payroll Professionals, says: "Employees can help by ensuring they provide a correct and valid NI number so the employer can report their contributions correctly at the year-end." She also urges individuals to keep the P60 that they get from their employer each year, a document which could be used, if necessary, to prove that they had indeed made NI contributions.
HMRC has tried to dampen down alarm about people not getting their full state pension entitlement because of lost NI contributions. Once people get to the age of 35, HMRC will start notifying them if they have NI contribution gaps which could threaten their ability to qualify for the full basic state pension. In theory, the individuals would then produce their P60s to show that they had, in fact, made NI contributions which had never been matched up to them. In reality, it is "completely unreasonable" to expect people to produce these forms decades after the event, says Deborah Cooper, pensions expert at actuary Mercer. She says that "some sort of pragmatic solution" would be better.
There are steps that people can make to check entitlements as they accrue. HMRC provides a service, on request, of providing "statement to individuals showing their NI contributions history". The Pension Service provides a pension forecast service (called BR19), and 4 million people used this in 2009/10. It is worthwhile checking that your NI number is correct and that your children start realising the importance of having an accurate NI number. Your payslips will probably contain your NI number, so you can check that your employer is using the right number. On tax, you should try to understand the annual tax code you are sent so that you can spot errors that might be made by HMRC in creating it. You should also think through whether HMRC knows about all your sources of taxable income and gains.
At the moment, individuals could struggle to understand their state pension entitlements since the main Department of Work and Pensions booklet on the subject, "NP46: A detailed guide to state pensions", was taken offline last August and, according to the department, "is being reviewed and is not currently available". A government spokeswoman says the next version should be online "by the summer".
There are some positive signs, however. With its "epass" system, Canada has set an example to other nations on how to give online access to its citizens for tax and other personal data. The APPGT will press for the UK to follow suit. The introduction of better (real-time) PAYE information exchange between HMRC and employers over the next two years would facilitate other technological developments, such as a UK version of epass.
* Citizens Advice www.adviceguide.org.uk and www.citizensadvice.org.uk
* HM Revenue & Customs www.hmrc.gov.uk
* Low Incomes Tax Reform Group www.litrg.org.uk
* Pension Service (to get BR19 pension forecast): www.thepensionservice.gov.uk/resourcecentre/br19/home.asp
* Pensions Advisory Service (independent provider of free information): www.pensionsadvisoryservice.org.uk/ and 0845 601 2923
* Tax Help for Older People (charity for pensioner households with under £17,000 income pa): www.taxvol.org.uk
'We waited three years for a rebate'
Chris Thompson is an unusual man. He spent three years pursuing a claim against the Department for Work and Pensions (DWP) on behalf of his daughter, Karen. Very few other people could have achieved what he did, even if they had the energy to research the facts and to have written dozens of times to the Government department.
"They would never, ever admit that they were at fault," says the retired insurance underwriter.
Karen was due to get rebates of National Insurance (NI) paid into her personal pension each year (since she was contracted out of the State Second Pension, then known as SERPS). "I checked on the 10 years of contributions that she had made," he says. "In eight out of 10 of those cases, the contributions were paid late." So while she was having her NI deducted from her pay packet each month by her employer, the Government was not delivering the rebate until months after the annual due date. "In the worse case, it was paid three years late."
Mr Thompson calculated that she was hundreds of pounds adrift. The stock market was rising at that stage and part of her pension was "unit-linked". This meant that investment units were purchased for her fund when money was paid in. "Karen had to buy units at a higher price because the market was rising," he says. Part of her pension was "with-profits" which meant that annual bonuses were added each year. If payments arrived late into her pension then her bonuses would be smaller.
After a three-year struggle, the DWP agreed to pay over £200 in compensation. Karen will get the benefit of that in 20 to 30 years when she retires. It sounds like a small amount but she was not a high-earner and even small amounts were important to her. The power of compound interest will also more than double that sum, in real terms, by the time she gets into her 60s.
In some cases, for people who are earning high salaries, Mr Thompson thinks that people could have been losing out on sums of over £1,000 if their rebates were paid in late over a decade in the same way that his daughter's were. But few of them would ever have realised there was a problem. "I don't think anybody checks with their insurance companies as to when they receive the money," he says. Few people will find that they have a similar problem to hers in the future, as "contracting out" of the state system has become much less common place. And insurance company Aviva reports that there are no problems now. "We had no unexpected delays last year," says spokesman David Gwyer.
But Mr Thompson would like individuals to have more information about their pensions. "Your insurance company should be able to tell you if they are receiving your contributions late," he says.
Cutbacks hit pension hopes for 500,000 women
* Up to half a million women in their 50s are facing potential financial difficulties after a crucial government vote about their pensions went against them on Wednesday, reports Simon Read. The House of Lords voted to support proposals to increase women's state pension age by up to two extra years starting in 2016.
The move will have an "unfair and disproportionate impact" on 500,000, according to Shadow Pensions minister Rachel Reeves. "Many of the women affected will have worked part-time to raise families, have been prevented from paying into an occupational scheme and have faced years of inequality in the workplace," Ms Reeves says. "They aren't in a position to prepare for a sudden two-year rise in their pension age and the Government is wrong to be making them do so."
Ros Altmann, director-general at Saga, says: "This is a cruel blow for women in their mid to late-fifties who have been treated with disdain." She pointed out that in its Coalition agreement, the Government promised that the pension age for women would not start increasing before 2020, but now plans to increase it from 2016.
"If life expectancy is increasing, then pension ages should rise, but it has to be done fairly, with sufficient notice for people to plan," Ms Altmann says.
Age UK has pledged to step up its campaign against the Government plans. "There is growing opposition to speeding up the pension age rise," says Michelle Mitchell, Age UK's charity director. Go to www.ageuk.org.uk/spa for more information.
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