Government to send state pension warning letters

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MPs on the Work and Pensions Select Committee had previously raised concerns that over-50s may be unaware that they're required to have at least 10 years of National Insurance (NI) contributions to qualify, and could miss out on being able to make up any shortfall before they retire.

The Government have now responded by saying they will write to those within nine years of state pension age who are likely to have fewer than 10 qualifying years of contributions by retirement age.

The decision, which the Department for Work and Pensions says is a "one-off exercise", is designed to help address the widespread confusion about who is entitled to what under the new state pension, which was introduced in April.

Mistaken assumptions

The Government have been criticised by the Select Committee for relying on "general awareness campaigns" in promoting people's understanding of the changes.

There is a system in place under which people can access personal statements providing a forecast of their potential State Pension incomes - but this is only available on request.

The problem here is that, the name suggests, and the majority of people assume, that the flat rate applies to everyone, so few people actively bother to check.

This could be a costly oversight given that around 55% will receive less than that so-called flat rate of £155.65 per week.

Who's affected?

The Government have said that they only want to spend pension money on people making a "significant" economic or social contribution to the country.

In practice, this means excluding those who've paid less than 10 year's worth of National Insurance contributions.

Steve Webb, who helped engineer the changes to the benefit in his role as Pensions Minister in the last Government, said that for people who spent their life in the UK, it was "almost impossible" not to build up 10 years of contributions.

He told the Commons Select Committee that: "you just cannot not get 10 years if you are outside prison, frankly".

Unfortunately, this isn't really the case.

For example, under the old state pension, some people were able to derive rights to a pension based on their spouse's NI contributions.

Under the new system, these entitlement rights - which mostly applied to women - will not usually be recognised.

Meanwhile people who've arrived in the UK later in life - such as refugees - may also fail to meet the minimum qualifying period of NI contributions.

Less than expected

But it's not just those with fewer than 10 qualifying years who will lose out.

Even now the new state pension is in operation, many people seem not to be aware that those who haven't accumulated at least 35 years of NI contributions will also receive less than the "flat rate".

Under the old system people approaching pension age only needed 30 years of qualifying NI contributions to get the full State Pension .

The Government previously said they would not directly contact those at risk of falling short - and they still believe they can get the message across via the general awareness campaign they plan on running until 2019, and pointing people in the direction of the digital-only Check your State Pension service.

They make it clear that the onus will always be on us to access this service, rather than our being provided with, for example, automated state pension statements - primarily because they estimate that issuing them would cost "well over £100 million".

Making up the shortfall

Ministers do, however, say that they are "exploring" whether the Check your State Pension service should be enhanced, by allowing people to pay voluntary NI contributions online.

At the moment, those who wish to fill in any gaps on their NI record must work out whether they need to pay Class 2 or Class 3 contributions, and get in touch with HMRC to arrange payments.

It's worth pointing out that voluntary contributions can normally only cover any gaps that have occurred within the past six years.

However, depending on their age, some people will be allowed to make payments towards holes in their contribution history from more than six years ago.

The Government say that those making voluntary contributions "usually pay the current rate", which for the 2016 to 2017 tax year is £2.80 a week for Class 2 and £14.10 a week for Class 3.

From October 2015 until April 5th 2017, people who reached state pension age before April this year will be allowed to pay voluntary Class 3A National Insurance contributions to purchase additional State Pension.

However, as we've pointed out elsewhere, these contributions make little financial sense for those who don't already have a full NI contribution record.