A number of pensioners may be in line for an unpleasant surprise in the latest instalment of the state pension reconciliation saga.
As some of you may be aware, the Government’s reconciliation service was aimed at allowing occupational pension scheme providers to reconcile their records with those of HMRC.
To start at the beginning, those of you who have been diligently swotting up for AF7 will be aware that between 1978 and 2002, the state earnings related pension scheme (SERPS) was in operation. Most of you will also know that scheme members could contract out using an appropriate occupational pension scheme, which would result in the redirection of NICs into the scheme. Between 1978 and 1997, a scheme used for contracting out had to undertake to pay a benefit in relation to those premiums which would be no less than the benefit which would have been accrued via the state pension. This benefit was known as the Guaranteed Minimum Pension and the member’s SERPS entitlement would be reduced accordingly.
All sounds good in theory. However, like most things pensions related, it’s more complicated in practice. In the course of 40-odd years, records can tend to be lost or distorted, with the effect that the details held by schemes and HMRC/ DWP regarding contracted out contributions may be somewhat disparate. In 2016, HMRC launched its reconciliation service, giving firms and schemes a two year window in which to reconcile records held.
On numerous occasions, the reconciliation has drawn some unpleasant skeletons out of the closet. Specifically, due to record keeping error, guaranteed minimum pensions paid to scheme members may not have been reflected by the relevant deductions from the member’s state pension. In other words, Her Majesty’s finest may not have been aware that national insurance contributions were being paid into the contracted out scheme, with the result that the state pension entitlement remained payable at the full rate. This has potentially resulted in pensioners who retired prior to the single tier state pension being implemented in 2016 being overpaid, sometimes by tens of thousands of pounds.
Whilst members who have received over-payments in good faith (i.e. basically all of them) will not be asked to make repayments, there is still the potential for an unpleasant surprise in the form of cuts to future benefits. It is not clear how many pensioners have been impacted, but estimates are that the number could be in five figures.
Thankfully, the reconciliation service closed in December 2018 and can’t do any further damage. However, it is worth bearing this in mind when advising clients whose state pension forms a significant part of their retirement planning provision.