Pension experts suggest the Government is likely to introduce measures to ensure individuals who contracted out are not overly rewarded through its proposed simplification of the state pension.
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The Department for Work and Pensions this week confirmed proposals to introduce a flat-rate state pension expected to be £140 a week for new retirees under simplification plans which would see the removal of the state second pension and the ending of meanstested pension payments.
However, it remains unclear how officials will treat people who have contracted out of S2P or Serps and may have built up large pots.
Hargreaves Lansdown head of pensions research Tom McPhail says “a fairly simple” mechanism could be introduced to reduce the universal state pension depending on the number of years the individual contracted out.
He says: “It is entirely possible that the DWP could insert some kind of fairly simple reckoning mechanism, whereby the universal basic state pension will be £7,280 a year but for every year you were contracted out the Government will reduce it by £x.
“So if you were contracted out for 20 years, you might only get £6,000 a year, for example. They may yet bring people’s contracted-out history back into the reckoning.”
Scottish Widows head of pensions market development Ian Naismith says solving the contracted-out issue would be “the single most difficult thing” in reforming state pension provision. He adds: “For people who are contracted out, the simplest thing would be to take out the equivalent amount they would have lost if they were contracted in. Whether they will do that, I do not know.”
Experts believe measures could be introduced to boost payouts to individuals who would have been in line for state benefits much higher than £140 a week due to a combination of S2P or Serps and the basic state pension. Standard Life head of pension policy John Lawson says: “The universal pension will not replace S2P or Serps overnight. I think people will get a credit for the Serps or S2P they have accrued.”