Pensioners who will not receive the full flat-rate state pension due to ‘contracting out’ are not losing out and have been ‘treated generously’, according to pensions minister Ros Altmann.
Contracting out is a complexity of the current state pension system but will not be allowed under the new flat-rate state pension. The state pension, under the old system, was split into the basic state pension and the state second pension (S2P).
In the late 1980s the government encouraged workers to ‘contract out’ of S2P meaning the national insurance contributions (NICs) they paid were rebated back to their workplace pension. This was seen as a good thing as it boosted workplace pensions but what many workers didn’t realise was that they were no longer building up NICs towards the state pension.
Fast-forward to today and many pensions who have worked for 35 years or more will find they do not qualify for the full £155-a-week rate on offer under the flat-rate state pension that will coming in in April.
Altmann said there was a lack of understanding around how NICs and the state pension were linked.
‘One of the shocking things we discovered…was the lack of knowledge among the general public on just what the state pension is. There was a significant proportion of people who did not realise there was any link between their NI record and the state pension,’ she said.
‘Where things have gone wrong is that everybody thinks it is a flat rate £155, £156 or whatever. The flat-rate bit is the build-up, so every year in the new system you are building up
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