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Estimated £2.7 bn of State Pension underpayments – what we can learn

With around £2.7bn expected to be paid back to about 200,000 individuals, predominantly women, here are three lessons to take from the recent State Pension underpayments.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Last month, the Department for Work and Pensions (DWP) released information explaining that it had underpaid tens of thousands of women their State Pension – an estimated £2.7bn, dating back to 1992.

The under-payments mainly affect a number of different groups of women and relate to the ‘old style’ State Pension for those who reached State Pension age before 6 April 2016.

For example, some women who were married or in a civil partnership and reached State Pension age before 6 April 2016 might be entitled to an uplift based on their partner’s National Insurance contribution record.

But the payments could take months to make their way back to their rightful place and in the meantime, lots of women across the UK are still receiving minimal State Pension payments. As little as 86p a week in some cases.

If you think you could’ve been affected by State Pension underpayments, contact the government’s Pension Service. In some cases widowers and heirs of married women might be affected as well.

The lost payments could make a meaningful difference to lots of women’s lives – especially in a time where the Gender Pension Gap continues to inch forward.

But it also serves as a cautionary tale of the importance of not relying on the State Pension alone. Here are three lessons to take from the recent State Pension underpayments.

1. The State Pension shouldn’t be your everything.

It’s never too early, or too late to make sure you know the ins and outs of your pensions.

The current State Pension age is 66, rising to 68 by 2046. But you will also need 35 qualifying years of National Insurance (NI) contributions in order to qualify for the full new State Pension amount. You’d need at least 10 qualifying years to receive any new State Pension at all.

Lots of women often don’t realise that they won’t have enough qualifying years to receive the full new State Pension. It’s usually because women take more career breaks, for example to care for children.

When women do return to work, they might do so on a part-time basis and earn less, meaning they might not have earned enough for those years to be ‘qualifying’.

With over a third of women viewing their State Pension as their main source of income in retirement, there’s an increasing concern that lots might struggle once they’ve finished working.

That concern heightens for some same-sex couples, as the gender pension and the gender pay gap is effectively doubled.

If you’re worried that you aren’t going to reach the number of qualifying years to be awarded the full State Pension, there are a few things you can do.

The first is to look at how many qualifying years you have and check your forecast of how much you might get from your State Pension.

The second is to make sure you know how many workplace pensions you have, and how much they’re worth.

Finally, if you’re not sure about your retirement savings, you can speak to one of our financial advisers. They can help you plan out your retirement and give you advice on how to put your best financial foot forward.

More on the cost of financial advice

2. Don’t ignore divorce

Divorce isn’t usually the first thing we think about when it comes to pensions and our later life. But it’s a reality for lots of couples.

Just under half of divorced women expect to have to rely on the State Pension. What’s more is that the average divorced woman has less than a third of the pension wealth of the average divorced man. And with women in the UK having a higher life expectancy than men, this could mean some women are living below the poverty line in their later years.

But there are things you can do as a married couple to help make sure you’re both secure in the long term, whether you divorce or not.

One is to discuss your short, medium, and long-term goals. Make sure you agree on how you might reach them as a couple and individually if you want to realise some of your own personal goals.

Secondly, if like in some relationships, it’s your partner that usually deals with the family finances, consider sitting down together and understanding household income and where your joint money is spent – including property costs, like mortgages, or utilities. That way, if you divorce and keep the family home, you’ll know the costs and be able to plan your finances and goals accordingly.

3. Don’t forget about financial advice

Whether you’re approaching retirement, about to retire, in retirement or even a long way off, there’s no wrong time to take advice, nor is it ever too early or too late.

Lots of women often leave taking advice until a significant life event occurs, like the death of a partner, but advice can help you plan for smaller life events too.

There’s also a misconception that if you aren’t incredibly wealthy or aren’t going to retire on a large income, you won’t need advice.

In fact it could be the opposite.

Financial advice isn’t just about getting investment advice or pension advice, it can help you to plan out your finances in all aspects of your life.

This includes understanding your debt commitments, how to plan for your short, medium and long-term goals, and even how to invest for future generations. But more importantly, financial advice can help you feel more financially confident.

Speaking to a financial adviser, especially if you think you might not get the full State Pension, can help you to map out your finances during retirement. Particularly if you have divorced, or are separated and aren’t sure whether or not your pension will be enough for you in later life.

Key takeaways and what to do next?

1. Calculate how much State Pension you could receive and check for any gaps in your NI record. You can do this on the government’s website. Make sure your State Pension can help to support you in later life.

2. Don’t rely on the State Pension alone. If you have gone back to work after a career break, take full advantage of your workplace pension. Increase your contributions as much as you can and understand where your pension is invested. If you qualify for auto enrolment, you’ll also benefit from employer contributions – your company will pay at least 3% of your salary and might even agree to match anything above that up to a certain amount.

Use our pension calculator

3. You might be able to pay voluntary contributions if there are gaps in your National Insurance record, but you can only usually pay for gaps from the past 6 years.

4. Think about consolidating old workplace and personal pensions by bringing them under one roof. This could help you to better understand how much money you might be able to take as an income in the future. Make sure you check whether you’d be giving up any valuable guarantees or be charged exit penalties by transferring. How to transfer a pension.

£3.7 billion in forgotten insurance, pensions and investments

5. Set up a self-invested personal pension (SIPP) to help you save for your retirement. If you’re a UK resident under 75, you’ll automatically receive 20% tax relief from the government on what you pay in. Those who pay tax at higher rates could claim back further tax relief through their tax return. Tax relief on personal contributions is limited to 100% of your earnings, or £3,600, if this is greater. Pension contributions are also subject to an annual allowance, which is £40,000 for most people. You can also invest this money to try and help grow your retirement pot.

More about a SIPP

Remember money in a pension can’t normally be taken out until 55 (57 from 2028), when up to 25% is usually tax free with the rest taxable. Investments rise and fall in value, so you could get back less than you invest.

6. Get help with financial advice. A financial adviser can help you with financial planning for the future and help you to get the most out of your pension.

This article isn’t personal advice. If you’re not sure if an action is right for you, ask for financial advice. Tax rules can change, and the value of any benefits depend on your circumstances.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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