/ Money

Do you understand your state pension forecast?

Pension pot savings

Following a Which? investigation into state pension forecasts it’s clear to us that the Department for Work and Pensions still has improvements to make.

I’m a fair way off qualifying for the state pension, but I was curious to see an estimate.

I’d say that the information in the paper and online statements I received was broadly useful. However, there were some key omissions.

State pension forecast

First, although they cover your National Insurance (NI) record to some degree, what this means and what you can do to plug any gaps is largely absent.

Secondly, your contracting-out record must be used to work out your state pension and ‘Contracted Out Pension Equivalent’ (COPE) estimates. (Before 2012, you could contract-out, or choose not to make contributions to a second, top-up pension, provided by the government.)

COPE is an estimated figure used to give you a rough idea of what you’re likely to get from other pensions, if you’ve opted out of the additional state pension. But the workings aren’t shared, and there’s no way of checking the DWP’s (Department for Work and Pensions) sums.

HM Revenue & Customs (HMRC) says that if you want to know whether you were contracted out, you should contact your pension scheme provider or employer. But this could take a great deal of time and effort, particularly if you’ve had several employers and some no longer exist.

Overall, this system isn’t all that clear and the confusion could lead people to question the accuracy of DWP’s calculations.

We think people need detailed contracting-out information to help them understand their state pension entitlement.The DWP should include this information on both your paper and online statements – and soon.

Working out your state pension

In fact, we think there’s still much more that could be done to improve pension forecasts.

In a separate piece of research we carried out earlier this year, we found that over a third of people approaching retirement age find it difficult to keep track of their pension pots. So we were pleased to see the Treasury back our call for a ‘Pensions Dashboard’ to be delivered by the industry by 2019, this will house all the information necessary to help savers make informed decisions about their retirement choices.

If you want to find out what your state pension forecast is there are a number of ways you can do so. HMRC provides an online service, it takes about 10 minutes and you’ll need to confirm your identity and provide your NI number.

Or if you’re over state pension age or reach it in less than 30 days, you can get a paper statement from the Pension Service. And if you’re retirement date is further off then you can contact the Future Pension Centre.

Have you seen your state pension forecast? Did you find your forecast confusing at all?

This investigation originally appeared in the September 2016 edition of Which? Money.

Dawn says:
28 August 2016

Still waiting! Use a MAC so had to load another browser just to log in to Government Gateway and ended up phoning up anyway as site still didn’t work. Have been promised a breakdown in due course but because I am a female born in 1961 they were unable to give me an idea of what Government Pension I would get at the time. That was a year ago!!
Really need to know if it’s possible/worthwhile adding to my contributions to make up a full pension as have over 30 years but less than 35. Feel totally let down and confused.

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I think paying back years is only limited to two, or it was when I enquired the other year. Do not know/have not heard anywhere if the government is going to allow unlimited payment of back years. Would be good to allow up to 10 I think.

I am 62, and went online to see what my state pension would be. It confirmed I have paid 45 years of full contributions, and am on target to eventually receive the full state pension.. and yet the forecast stipulated that I would only get the full state pension if I worked a further 2 years… if I don’t work 2 more years my pension will be reduced by a total of £150 a year, when I eventually receive it at the age of 66. WHY?? I left a comment asking for an explanation, since I had surpassed the stipulated 30 years qualifying contributions by an additional 15 years already. I received no reply.

Ms G. I.
(One of the fed-up 1954’s women whose retirement age rose from 60 to 63, then to 66 (all at the end of a lifetime of contributing, having believed that I would be able to retire at 60). CAN YOU IMAGINE paying into a private pension scheme for 45 years, the terms at the outset being that the pension scheme would pay out when you reached 60, to then have the payout date deferred TWICE by a total of 6 YEARS?? It wouldn’t be allowed, would it?

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Gina – The alteration to the pensionable age has been in the melting pt for a long time but the previous two government didn’t exactly publicise it. Adjusting it again was another unfortunate, and somewhat shame-faced, decision but necessary to harmonise the men’s and women’s pensions after the setting-back of the men’s starting date. If only they had dealt with the equality issue before they started tinkering with the pensionable age problem. The only consolation is that this is all based on the premise that, on average, we shall all be living longer than when the 60/65 pension ages were introduced so will draw our pensions for longer even with a later start.

I would like to know why you cannot fill in the gaps after 6yrs?

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The difficulty with the state pension is on several levels. Unlike a private pension, you don’t pay into it directly and build up a pot of money. The pension is paid from the current NI and tax take made by those in work.

The retirement age had not changed since its inception and many would originally have only drawn their pension for a year or two before dying, but we are now living much longer, and therefore also drawing pensions for much longer – against fewer people proportionally in work whose taxes fund the pension.

Women live longer than men so it. in principle, is not unreasonable to bring their qualifying ages into line.

Against this huge increase in cost to the taxpayer, we (well, the government) have to decide on a solution that the country can afford. I would encourage as many as possible to pay into a private pension from an early age so that they could access a known “pot” when it suited them.

I would also ensure that public sector pensions and private sector ones were set on the same basis in terms of retirement age, contributions, and abolish the final salary schemes that are a huge drain on the taxpayer. It is also tempting to have a sliding scale of the state pension that reduces as the income from other sources increases above a set lower limit. As we do not build up our personal fund in the state pension system I do not see that we have an entitlement to expect an income when we are already well provided for. Savings achieved here could be used to help underpaid state pensioners.

I read something recently by money guru Martin Lewis that he reckons people need to make pension provision of something like 15% of their income to make sure they can enjoy a reasonably comfortable retirement. I think that rules out an enormous number of people who are either buying their own home, renting, or commuting. Since the costs of living after retirement are not much different whether you had a well-paid job or a poorly-paid job during your working life, that 15% is rather simplistic. If the national average income is £27,500 that means putting £4,125 into a pension scheme each year, but if someone on £20,000 only put £3,000 a year away [15%] it wouldn’t buy much of a pension when they retired. There is certainly a need for a much more comprehensive, equitable and longer-term view if we are to iron out these anomalies and provide decent incomes for people after retirement. That might not find favour with certain people who enjoy relatively privileged positions but the alternative for society as a whole could be worse.

Good stuff on a vital topic.

The elephant in the room is that given the time spans there is no certainty whatsoever that even if you do all the right things that in retirement you will have adequate funds to maintain a reasonable lifestyle.

Regrettably this elephant also brings the news that our belief in the State being able to pay pensions into the future is not grounded in reality. Governments overpromise to get elected. Whilst there is discussion on triple lock, double lock etc. what is not discussed is whether the economy will be in good enough state to fund all these expenditures.

The NHS becomes more expensive and more advanced and keeps pensioners alive longer . The period after WW2 was so good that extrapolating forward based on a golden era does seem rash to my mind.

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Looking into the future, the rising costs of drugs and other treatments is certainly a major problem that will have implications for the economy to sustain a longer pension entitlement or a higher level of pension payment [bearing in mind socisety’s demand for both]. There is a clear conflict between enabling people to live longer and having the means to support them if they do. And as Malcolm rightly points out above, the ‘burden’ of this falls on the currently-working population at the time.

Once a drug manufacturer has come up with a ‘cure’, or at least a palliative remedy, for high-profile conditions it virtually has the health services of the world in its grasp. Every time there is a decision by the NHS to deny prescription of a new ‘wonder’ drug, or not to approve an advanced but expensive treatment, there is a furore whipped up by the media [no doubt prompted by the industry] and the allegations of a postcode lottery if one hospital trust will provide it while another cannot afford to. Should the clinical professions be the people who determine? – medics are doctrinally incapable of tolerating the suffering of others if a treatment exists; or should it be in the gift of politicians to make these decisions? Is this analysis fair or exaggerated?

I think we are approaching a critical cross-roads where we have to decide whether we look to the state to meet reasonable pension expectations out of bearable taxation, or spend more money on health services which will actually prolong lives and make the first question even more difficult.

Perhaps like the living wage, all employers and employees should be forced to make contributions into regulated UK investments and bonds through iSAs to build a pot of money that could only be accessed at a set age. Independent of the tax system, applicable to all. But, of course, this would leave problem groups – the self employed, casual workers, those with more than one job, for example would add complication. I believe only by “possessing” your own fund can we ever get out of this problem.

It would, of course, push up wages (but an ever increasing load on the state pension pushes up taxes, so also wage costs), and it would reduce spending power (maybe not such a bad discipline). I think we need, in general, to look after ourselves and expecting the “state” – you, me and all others who work – to provide a high pension is unrealistic. It won’t happen, we need to make our own provision for our future, just like most of us have to use our best efforts to live adequately while we were working.

The NHS annual drug spend is reported as £15.5bn. It is estimated that “extortionate” drug prices – presumably those suddenly inflated – add £260m. If these inflated prices are simply profiteering, and not placing the real cost on otherwise under-costed products, then it should be stopped. I would have thought with the NHS spend at these major drugs companies they would have had a powerful weapon if they chose to use it. However, it still only represents 1.7% of the bill, and 0.2% of total expenditure, so needs to be kept in perspective.

The problem with new drugs, like any other new procedure, is that the prospective patient sees it as a possible lifesaver, or life prolonger, for them, and the cost is irrelevant. But some control has to be placed on such costs as the taxpayer cannot provide a bottomless pit of money, no more than they can with the state pension. Faced with this situation I would look to buying a non-prescription drug or treatment privately by raising money however I could for a sick relative.

I’m sorry this has departed from the topic, except there is a weak association; keeping people alive longer – maybe much longer – not only adds to NHS costs, but to state pension costs. What price life?

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David Williams says:
29 August 2016

I applied for my pension forecast after they sent me a letter telling me I could apply for my pension and get a forecast, this I did, went to the website filled allbthat they wanted then I had to wait for a code in the post??, This came within a week, then another username arrived, so wentvto the website input both of these, I was expecting the pension forecast, what did I get, another online form asking if I wanted to apply for my pension forecast, over the next week I received two sets of codes, they are hopeless, God knows what will happen to my pension

I would go onto their website and download the form to receive a pension statement by post, I filled one in( kept a copy) posted it and within two /three weeks I had a reply with the minimum amount per week they were going to pay me. Try that!

Got around 3 years to work until the new retirement age. Basic state pension forecast seems accurate enough but what it fails to adequately explain is SERPS and Contracting Out. I was contracted out while working for one employer but did that continue once I changed jobs (with a period of self employment and unemployment in the 5 year gap between major employers)? I do not know. Exactly what second pension am I entitled to? The other rather common issue is multiple employers with multiple different pension provision and/or private pension schemes. Currently in a local government pension scheme. Some like the LGPS have provided some indication of likely pension. Others I have no idea. Plenty junk mail offering to let me take money now (and make lots of money for the pension companies). Getting adequate advice without paying a fortune to a “pensions advisor”, if there are any honest types in existence to even ask, appears to be a lost cause. Why when a young student did I not just start putting contributions in a biscuit tin under the bed – I would now be sitting with a substantial investment that would easily retain current lifestyle into retirement. Unfortunately I didn’t!

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I obtained a forecast well over a year before retirement and this informed my decision to retire. The amount (adjusted for inflation) was confirmed 3 weeks before I retired. It was not until after I had already retired that I was informed that my pension was actually £23 per week less than these forecasts. During those 5 weeks, the Pension Service had ‘found’ contracted out years from 1978 to 1984 (especially odd since I worked for the same employer between 1975 and 1984/5). Apparently the onus was on me to check and I would probably have delayed retirement had I been aware that the details were incorrect to this extent.

Helen Higgs says:
30 August 2016

I’ve just turned 59, am female and have worked since I was 16, with only a few months of unemployment over the years. I’m a reasonably intelligent person and have been trying for months to find out what I can expect from retirement.

I had final salary pension schemes when everyone advised they were the best thing since sliced bread, but lost the last one in 2002. I would never pay into a defined contribution scheme because of the annuity rip-off and the triple whammy that had on women. It was much too late for me when they removed that rule though I have tried to top up as much as I can.

Meanwhile successive governments have loosened the rules on final salary schemes and I’ve seen my predicted final values fall from (for one scheme for instance) £13,500 in year 2000 to around £9000 today. Also during that time my state pension age has been raised from 60 to 66 and I can’t even find out what it will be when I get there. I strongly suspect it will be nothing, due to the years contracted out. And of course the latest moves around final salary pension schemes look set to let all providers default and let the government compensate us to the tune of 50%

In a desperate bid to provide for ourselves in a way in which we had some control, my husband and I went the way of many and bought a buy-to-let property. Now we are being penalised by having to pay tax on the rent before mortgage deductions while the really wealthy and avaricious professional landlords can avoid that.

It’s too late to go back and re-live our lives. We’ve done everything right and now we are being robbed blind. Meanwhile big business and the really high earners continue to pay minuscule amounts of contributions into the economy they feed off.

To say we are bitter doesn’t go close enough. We are increasingly aware that, while the rest of the developed world lives mainly in societies, ours is just an economy and once the economic units no longer function they are written off

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I am about two months off receiving my State Pension, I request a State Pension Statement form from their website a couple of months ago and I received a statement from them in the post in June with an estimate ( they stated this will be greater as I am still contributing to NIC). At the beginning of August they contacted me again to say I was near claiming, so I rang them to set it all up. The only query I have is that they couldn’t finalise it in the Birmingham office it had to go to Newcastle. They told me if I haven’t heard from Newcastle 10 days before the pension date to ring them again and they would chase it up. So far I am happy with the service I have had from them.

I agree totally with the way it’s worked out being over complicated. Both my wife and I applied for the forecasts, she’s 60, I’m 63. I get mine when I’m 65, just inside the line, but she has to wait till she’s 66. My record is mostly good news, though the contracted out part is unclear. Hers’ had some years flagged as partial contribution, and one year as NO contributions. fortunately we still have all her P60’s even though she stopped working years ago, due to poor health. We were able to show she had fully contributed for the year she was supposedly not contributing. They accepted this (though the paperwork from them suggested THEY had discovered this and notified us, not the other way round!) Still made no difference to the forecast, although she has more years than required, she was only entitled to the maximum under the old system, not the new system, something to do with years before and after a specific date. The rules are very confusing, and the forecast paperwork does not make it understandable. It’s laid out as per their process, not in a clear way for pensioners to understand. It’s also very annoying that she gets less for something she now has no power to change. We’re fortunate we had several private and employment pensions so are comfortable, we have friends in their late 60’s still working as they don’t get enough to live on.

Each time I try to use the government site to get a pension forecast, the forecast isn’t available. I tried again this morning, prompted by Which? – the response this time is, “Sorry, your National Insurance record is a bit complicated, so we cannot give you a forecast. We’re working on fixing this.” If they find things too complicated, what hope is there for me?!

I found it very confusing and I was in a previous life a financial adviser. I have been a member of various contracted out schemes and based on the estimate, which admittedly I got before the recent changes to the state pension, I have no idea how much state pension I will get . Perhaps the estimates have changed since the changes to the state pension ? I will get another estimate and find out. I found that the old estimate would have given the impression of a much higher pension because it presumed that you were always contracted in, the small print warning you of this would not have been obvious.

I tried to work out what I would get under the new rules because I have spent many years contracted out but gave up because I am 58 now and the rules may well have changed again by the time I get to state retirement .

I was surprised, although in retrospect I should not have been, when my national insurance contributions changed this year as the scheme I am currently in is , in retrospect obviously, no longer contracted out; meaning I will have some earnings that possibly , make me eligible for some of the new higher rate of single pension?

I think that people , like me, that requested a pension estimate before the pension changes should automatically be sent a revised estimate as many will not be aware and will be basing their plans on obsolete information.

Found it easy to log on to the new government website and viewed my estimated pension. I was surprised that my forecast was a bit short of receiving full pension. Although I have taken an early retirement the website shows I have 40 years NI contributions. I assume as I have a private pension that my company opted out of paying full NI for a period. I would have expected if the website can advise that I do not qualify for a full state pension then it must have the back up information, if so why can’t they show this to avoid confusion. Maybe it is just me or are other people confused as to why they do not qualify for full pension.

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Had a look at my forecast via Government Gateway. Weirdly, though I have only been in employment since Oct 1994, it shows me as having 25 years’ contributions. Checked the record and it shows full years were paid 1987-1990 -when I was in school! Is this a perk of staying in the education system beyond 16 that I wasn’t aware of?! But then also says I need 13 more years for a full state pension, whereas I understood you only need 35 years i.e. only 10 more, so perhaps those odd three years don’t actually count in reality!

Steve Wilson says:
3 September 2016

I received a pension forecast last year and this year to prepare for my 65th birthday next year.

The information contained in the forecast was clear but difficult to comprehend. I had fewer credits than expected because, unknown to me, the MOD had contracted out of making additional State Pension contributions. Although I was employed by the government for 39 years, I was in a private pension scheme. I phoned both the DWP and HMRC who were both very helpful but, despite being eligible for the new State Pension, sadly there is nothing I can do to restore my state pension that has had a deduction of £84.21 imposed because I had been contracted out.

I am very disappointed to find out at this late stage, that I will receive significantly SP less than I was expecting because of a decision made by the MOD without either consulting me or advising me in time to make other provisions. All this on top of the imposition of index-linking to CPI rather than the RPI in force throughout my career. Insult to injury!

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My state pension is due this November when I reach my 65th birthday. My pension quote is £123 not the £155 widely publicised. I have yet to receive a detailed account of how this was arrived at, just the fact that I was contracted out meant that my contributions had a shortfall. However they have not taken into account that I paid NI for 42 years , substantially more than the 35 years minimum. Is this fair and / or correct ?

Yes Derek, because National Insurance contributions pay for much more than the state retirement pension, including statutory sick pay, redundancy pay, and other in-work benefits. People who have already contributed for 35 years cannot then stop making NI contributions but that is the minimum period for qualifying for a full state pension. NI contributions are reduced under contracting out because the state is relieved of part of the burden of financial provision in later years through the existence of an occupational pension. The state retirement pension is in fact largely funded from taxation on people currently in employment and not the NI payments made by pensioners during their working lives.

Alan Unwin says:
4 September 2016

Those people who are contracted out also have a another issue to contend with and that is when they are retired as per the state pension there is a little know rule for contracted out people that the company has to supply a Guaranteed minimum pension (GMP). This can equate to 25% of the company pension involved. This part is subject to different indexing rules and as such is too complicated to go into here but generally because there is no SERPS element to the New state pension (NSP) there are parts that the old pension used to cover in the indexing paid by the government and parts paid by the company. I’m not sure if the consultations are finished yet but its very likely that the people with this issue will be technically become one of the losers as from the governments perspective there are winners and losers.

Margaret` says:
4 September 2016

The Gov website says if you contribute 35 years NI you get a full state pension. When I logged on to get my forecast it still said I would get a full state pension. However, it then went on to say I would get more if I paid another 6 years worth of NI, which does seem contradictory. The Gov website is not clear at all.

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on my browser (latest chrome at time of writing) you need “www.” on the front to get to the server. eg

best as http://www.ifs.org.uk/bns/bn105.pdf

Its got some real hard sums in it though especially around SERP’s and S2P !!!

The document does not seem to mention how GMP indexing works at all as far as I can tell, and least of all it does not mention that SERPS/S2P was being used to uplift certain parts of the GMP increases since the late 70’s. It does state in section 2.3 that over the years pensions have suffered due to mis calculations, especially the 1975 act.

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point taken, I don;t understand unless its because I’m a member of which as well perhaps. To be honest I was surprised it let it through hence I put the correction in quotes to at least allow the text to work.

I thought that google does it automatically as well until it failed.

The HMRC forecast was definitely confusing as it said I had 1 year which did not have full contributions. One part said that I could contribute extra cash to make this a full year; elsewhere it said I’d got the maximum state pension that was possible for me anyway?

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While four-fifths of NI payments might go towards pensions, that still does not cover the entire cost of state pensions and a large chunk comes from general taxation. Pensions for current retired people are paid for from current NI and tax revenues, not from a historic fund. There is an NI reserve fund to even out cashflow imbalances but this is used by the Treasury as a balancing mechanism to provide internal short-term credits for government departments in order to avoid having to use bank loans where expenditure is running ahead of income. This is replenished in the later part of the tax year when the opposite applies.

After a failure to get a forecast online (problem with the Post Office verify process) my wife phoned the DWP. A few details were given and a few days later she has received a letter giving her pension date, qualifying NI contributions and the estimated weekly amount based on current state pension rate. Quick and successful.

I think it is a rip off the government still charging NI for people who have passed the qualifying threshold of the minimum years of payments. The government should stop taking people’s money! Any other organization it would be classed as theft/fraud. I also think if someone passes away before reaching retirement age, then the benefits should be passed on to their next of kin. But the grasping government keeps the lot!

I can see what you are saying, Peony, but National Insurance is not life assurance or an endowment policy.

As I have said previously, National Insurance contributions pay for much more than the state retirement pension, including statutory sick pay, redundancy pay, and other in-work benefits. People who have already contributed for 35 years cannot then stop making NI contributions but that is the minimum period for qualifying for a full state pension. The state retirement pension is in fact largely funded from taxation on people currently in employment and not the NI payments made by pensioners during their working lives.

The cost of providing the kind of state insurance provision you would like would bear very heavily on low-paid workers and employers and would impact on the rate of inflation. NI might not be perfect but it is simple, efficient, affordable, and keeps paying a basic pension until the end of your life. Also it is not based on how much you have paid in but on how many contributions you have made.

According to this page, you need only 30 qualifying years to receive the full state pension: https://www.gov.uk/state-pension/eligibility