DWP and state pension: Contracted-out members reminded of inflation timebomb

Savers who contracted out of the state pension are being warned that the guaranteed part of their pot, may not keep up with inflation.

The Department for Work and Pensions is being urged to do more to let an estimated 11 million UK savers know that they may be as much as £20,000 worse off because part of their state pension was not linked fully to inflation.

The issue is believed to affect people who contracted out of the state pension to join their employer’s defined benefit scheme between 6 April 1978 to 5 April 1997.

The state pension element of their pension, known as guaranteed minimum pension (GMP) was not indexed with a cap at three per cent on what is known as post 1988 GMP.

All the pre 1988 GMP contributions and anything in excess of threer per cent on post 1988 GMP used to be paid by the state.

The issue is only believed to affect those in private DB schemes as those in public sector schemes had the GMP part of their pension inflation linked. (Guaranteed minimum pension)

Anyone who retired on and after 6 April 2016 could be affected by the change.

Public service schemes
A decision not to link the pension to inflation should have been decided by MPs but appears nowhere in the statute books.

“This was almost two years after the parliamentary ombudsman report where they were found guilty of maladministration for not mentioning loss of GMP indexation to parliament or the public.”

“The DWP did not make information about GMP indexation not being paid under the new state pension public until 12 August 2021 which was over six years after it had become law.

A DWP spokesperson said: “We encourage anyone who is concerned to read the online factsheet on the changes – the Guaranteed Minimum Pension (GMP) and the effect of the new State Pension – GOV.UK – and contact us if they think they have been affected. “The publication of the factsheet is the final step in the Department meeting the Ombudsman’s recommendations on this issue.”

The spokesman added: “These changes only affect people who reached state pension age from 6 April 2016 who can benefit from the transitional rules of the new State Pension.

“The new state pension system was introduced in 2016 to provide a sustainable, clear foundation pension for people to build their private savings on top of. No one who qualifies for the new State Pension will receive less than they would have done under the previous system, based on their National Insurance record up to 6 April 2016.

“The factsheet describes the factors involved in this complex policy area and invites people to contact the Department if they want to know how they have been personally affected by the policy change.”

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