Why was my state pension reduced after my husband died?

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Please can you help me. My husband sadly passed away on 21 April this year. 

Since that time I have been advised by the Department for Work and Pensions that my state pension is to be reduced, as I have inherited his pre-1997 additional state pension and 50 per cent of his contracted out deductions.

My husband was in receipt of a pension of £127.15 a week since 2016 and whilst his pre-97 additional state pension was less than his contracted out deductions he was not penalised for this and total payable was nil.

State pension cut: Widow asks why her own payouts were reduced after she lost her husband (Stock image)

State pension cut: Widow asks why her own payouts were reduced after she lost her husband (Stock image)

State pension cut: Widow asks why her own payouts were reduced after she lost her husband (Stock image)

I am confused why I should now be penalised at such a difficult time. I cannot find any information that suggests that this may happen and the government site only refers to how you may benefit.

I understand that given the circumstances this is not an option and am only concerned why my pension that I have earned in my own right has been reduced. Any help you can give me would be much appreciated.

SCROLL DOWN TO FIND OUT HOW TO ASK STEVE WEBB YOUR PENSION QUESTION        

Steve Webb replies: Thank you for your question, and please accept my condolences on the recent loss of your husband.

I do appreciate that it seems extraordinary that your state pension has actually gone down following the death of your husband.

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

To understand what is going on, it is necessary to look at the arrangement that your late husband’s pension scheme made with the government many years ago.

This all relates to something called ‘contracting out’ which is a feature of the pensions system which causes endless confusion and which was finally abolished in 2016.

As you know, the old state pension was made up of two parts – a flat rate basic pension for those with the necessary record of contributions and an additional payment from the ‘state earnings related pension scheme’ known as SERPS.

Most workers were automatically part of the basic state pension, but some workers did not build up rights under the SERPS scheme because their company scheme had ‘contracted out’ of SERPS.

In simple terms, the company made a promise to the government that in return for paying a lower rate of employer National Insurance Contributions, it would provide at least as good a pension as your husband would have got had he remained in the SERPS scheme (known as his ‘gross SERPS’).

Your husband would also have benefited from a saving on his National Insurance Contributions at the time.

STEVE WEBB ON CONTRACTING OUT AND THE STATE PENSION

When your husband retired, the government looked at the SERPS he would have built up for the period up to 1997 (after which the rules changed) and deducted the amount that the company has promised to pay.

This amount is called a ‘contracted out deduction’ or a COD for short. In your husband’s case, the COD was more than the SERPS he would have built up (for various complex reasons) and so he built up no SERPS for that period.

Following your husband’s death, you inherit half of his ‘gross SERPS’ and also half of his ‘contracted out deduction’. The ‘gross SERPS’ is added to your SERPS entitlement and the COD is added to your own contracted out deduction.

Because you were receiving some SERPS for the pre-1997 period, this is now wiped out by the relatively large deduction in respect of your late husband’s company pension.

However, the other side of this coin is that there is a company pension scheme which still has a legal duty to match your share of the state pension your late husband would have built up had he not been contracted out.

If you compare your state pension at the start of the year with your state pension now plus the pension the company scheme is paying, you should find that the combined amount is significantly higher. In essence, part of your state pension is now being paid by your late husband’s employer.

I do appreciate that this is a baffling system, and this is one reason why it has now been abolished going forward.

The key point is that your late husband’s state pension and your late husband’s company pension are intertwined because of the process of contracting out, and so although one part has had a negative effect on your state pension, the payment of the company pension should give you a higher income overall.

ASK STEVE WEBB A PENSION QUESTION 

Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.

If you would like to ask Steve a question about pensions, please email him at pensionquestions@thisismoney.co.uk

Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.

If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0300 123 1047. 

Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful. 

TOP SIPPS FOR DIY PENSION INVESTORS



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