Thousands of retirees could be forced to pay back money that they’ve already received from their company pensions thanks to a huge project to clean up old pension records.
In 2016, HM Revenue & Customs (HMRC) launched a free two-year ‘reconciliation service’ to enable company pension schemes to match their employees’ pension savings and employment histories against those of HMRC’s.
HMRC relies on this data to make sure that it pays out the correct amount of state pension to people who were ‘contracted out’ of the additional state pension. This mostly applies to savers who have a defined benefit, or final salary, pension.
But once companies have finished matching up their data with HMRC, they could find that they have either underpaid or overpaid pension to thousands of their pension scheme members. Current pensioners could even be forced to repay the money as a single lump sum.
Which? takes a look at what could happen you have been overpaid your pension and how this could also impact your state pension entitlement.
What was contracting out?
In 1978, the government introduced a second-tier top-up pension, in addition to the basic state pension, which was based on how much you earned.
This was originally called the State Earnings Related Pension Scheme (Serps) and in 2002 became the State Second Pension.
Before the state pension reforms in 2016, employees were allowed to ‘contract out’ of this additional pension.
This meant that both employees and employers paid lower National Insurance contributions. Employees gave up the additional pension to put money towards a company pension or private pension instead. This typically applies to members of a defined benefit (DB) pension scheme, which provides a guaranteed income after retirement.
In 1988, the government extended this to include defined contribution schemes and personal pensions. These schemes invested contributions from both employers and employees to provide a pot of money for retirement.
The single-tier state pension was introduced in April 2016 and the previous system where you could ‘contract out’ of paying full NI contributions was scrapped.
Employers, which saved money by paying lower National Insurance, had to promise that the extra company pension they paid would match the additional state pension their employee would have got if they had remained contracted in. This is known as the ‘Guaranteed Minimum Pension’.
Why might I have been overpaid a private pension?
HMRC holds data on all the people who have a Guaranteed Minimum Pension, and how much they should get. It uses this to calculate how much state pension someone should be paid.
However, the information that companies hold on this can go back as far as 40 years – and as company pension schemes match up their data with HMRC’s, they could find that they have overpaid you using incorrect information.
For example, your company may have paid you a Guaranteed Minimum Pension when you did not have one; may have incorrectly calculated the amount of minimum pension you were due to receive; or the annual increases to the minimum pension (applied to ensure your payments keep up with inflation) may have been paid by both your employer pension and the state.
Last week, it was reported that the civil service pension scheme had overpaid its members to the tune of £22m, following the reconciliation process.
What will happen if my pension was overpaid?
Not all pension schemes will take the same approach if you have received overpayments from your company pension.
‘How pension schemes deal with overpayments will vary. While some pension schemes may write off any overpayments made, other will try to recoup money back from retirees,’ said Sir Steve Webb, director of policy at Royal London and former pensions’ minister.
Some pensioners may be alarmed to find that a pension scheme may ask for the money back as a single payment.
‘In the worst case scenario, which should be avoided completely, pension schemes may try to take back overpayments in a lump sum,’ said Sir Webb.
An estimate made by the IMT, a data management, systems and administrator firm – which was reported by the Financial Times – suggests that a person could be overpaid up to £50,000 over the lifetime of their pension.
‘At the very minimum pension schemes should adopt a mean-tested approach, which evaluates a person’s ability to make repayments and establishes a suitable time frame to back any money owed,’ said Steve Webb.
Will my pension change in the future if I have overpaid?
The Pensions Administration Standards Association (PASA) has published guidance on how pension schemes should approach reclaiming pension overpayments.
Geraldine Brasset from PASA told Which? Money that when pension schemes decide on how much future payments will be for a person who was previously overpaid, they will usually take one of three approaches.
‘The first is to carry on making pension overpayments and increasing the sum over time, this will include continuing to pay future pension increases, as originally stated.
‘The second approach would be to reduce an employee’s future payments down to the correct level.
‘The final approach involves continuing to overpay an employee’s pension but not applying pension increases, until the pension in payment is the same as what the correct pension payment would have increased to,’ said Brasset.
You should be given notice and further details from your pension scheme if your payments do change.
How many people are affected by this?
The reconciliation process is due to be completed by December 2018, so the number of people that may have to repay their private pension is not yet know.
However, there are current 10.5 million members of final salary pensions, according to the Pension Protection Fund, of which 47% are currently receiving a pension. If just 1% have been overpaid, or underpaid, that equates to around 50,000 people affected.
How can I check if I’m affected?
Unfortunately it is quite difficult to proactively check if your guaranteed minimum pension is correct.
Most pension schemes should keep you updated about any possible changes to your pension entitlement.
If you are unsure and think you might be affected, contact your pension scheme to find out if they are taking part in the reconciliation process.
‘Where a person might be unsure, it’s possible to ask their pension schemes if they are taking part in the reconciliation process to gauge whether there’s a chance their entitlement might change,’ advises Sir Webb.
Will my state pension be affected if I was overpaid?
If you were contracted out, there is a strong chance that your state pension entitlement could be affected if your company pension overpaid you.
This is because the benefit of contracting out was that both you paid reduced National Insurance contributions and, in return, agreed to get a lower state pension.
‘If a person’s company pension is readjusted following the reconciliation process, there is a strong chance that their state pension entitlement could change as well,’ said Sir Webb.
How do I check my state pension?
To check your state pension entitlement the first step is to use the State Pension Forecast service ‘Check your state pension‘, which is available on GOV.UK or via the Personal Tax Account.
The service is designed to help you identify:
- How much state pension you could get
- When you can get your state pension
- How to increase your state pension, if possible
Further details about your state pension breakdown can also be provided by the Future Pension Centre of the Department for Work and Pensions.