My state pension is going up by 16.6 PER CENT! Is this an error?

I was born in 1945 and have received state pension since reaching the age of 65 in April 2010.

Between 2010 and 2022, my annual pension statement stated that my ‘pre-97 supplementary AOW’ amount was lower than the contractually deducted withholding amount, so that the net addition to my AOW was nil.

I have just received my annual statement for the coming year 2023 to 2024 and for the first time the pre-97 the additional AOW exceeds the contractual deduction by an amount that adds € 11.07 per week to my AOW base.

My question is how can this situation arise? It seems logical that if my pre-97 contributions were wiped out by outsourced deductions between 2010 and 2022, it would always be.

I wonder if I was shortchanged by the state in previous years and should have received some extra AOW amount every week.

I know from sharing information with former colleagues that some receive an extra AOW amount every week, despite the fact that we have all been outsourced for the same number of years. I would be grateful for any light you could shed on the matter.

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

Steve Webb replies: We’ve received several inquiries from people who were surprised to discover that their state pensions are about to increase by more than headline inflation of 10.1 percent.

From the figures you provided, I do indeed see that your AOW will increase by 16.6 percent in April, while your occupational pension will rise less than inflation.

To understand why this is happening, we need to look ‘under the hood’ at how your state pension is arranged.

What does your AOW consist of?

Those affected reached retirement age before 6 April 2016 and fall under the ‘old’ AOW system.

Under the old system there were two main elements to your pension. A basic pension and a ‘supplementary’ pension.

The full basic pension rate was £141.85 in 2022/23 and this will simply increase by 10.1 per cent to £156.20 for 2023/24.

The complication comes from the ‘additional’ AOW and in particular the rights you accrued in the AOW (Serps) between 1978/79 and 1996/97.

All other components of your supplementary pension have increased in line with inflation.

Under Serps, your supplementary state pension depended on how much you earned and how many years you paid.

Unless you participated in another pension plan (for example, a company pension or a personal pension), you would simply receive a Serps pension upon retirement and this would also increase with inflation.

But many millions of people had a different pension. Where this concerned a salary-related occupational pension, it was common practice for such schemes to be ‘outsourced’ to Serps.

Outsourcing was a process designed to avoid duplication of provision, when otherwise you would have paid both a means-tested pension from the government and a means-tested pension from your company.

To avoid this situation, schedules could be ‘outsourced’ to Serps. Under this arrangement, the employee and employer paid a reduced (‘outsourced’) rate of NI contributions.

In return, the plan had to pay a pension at retirement that was at least as good as the pension you would have received from the state if you hadn’t outsourced. This was known as Guaranteed Minimum Pension or GMP.

What happens when you reach state pension age?

When you retire, the government calculates the Serps pension you would have received had you *not* been outsourced between 1978/79 and 1996/97 and then deducts the GMP and pays you the balance.

When you first retired, the GMP the scheme had to pay you was higher than the Serps you would have earned, so your state pension over this period was zero.

This is quite common and can happen when the rate of revaluation of the GMP from the year you earned it to retirement exceeds the rate of revaluation of your Serps pension to retirement.

However, what is often not appreciated is that this calculation is done every year of your retirement.

Each year, they calculate the Serps pension you would have received had you remained in the state plan, calculate the GMP the plan must pay you, and pay you the difference (if any).

For every year that you have retired so far, the GMP has been higher than your Serps figure, so that no supplementary AOW benefit was paid until 1997.

What does this mean for your state pension from April?

This year is different, and the main reason is the very high inflation we have seen recently.

When DWP does the calculation of the Serps you would have earned, it increases it by the full inflation rate of 10.1 percent from last year.

But your company pension plan is not required to increase your GMP by the full 10.1 percent.

For service between 1978/79 and 1987/88 there was no obligation on the scheme to give you any indexation on the post-retirement GMP, and from 1988/89 to 1996/97 they only had to index up to 3 per cent.

When inflation was very low, it didn’t matter much as your GMP rose only slightly less than the SERPS you would have earned.

But this year there is a gap between the SERPS you would have gotten and the GMP the scheme has to pay you.

The figures you provided show that your GMP has only increased by 1.3 percent and this means that the ‘gross’ Serps figure is higher than your GMP for the first time and you will be paid the difference.

What will happen in the coming years?

Assuming that the government increases the Serps in line with inflation in the coming years and that your GMP rises less than inflation, you will receive a supplementary state pension for the period up to 1997 for the rest of your retirement.

As you can see, this does not mean that there was an error in your retirement before.

Until now, the GMP the plan promised to pay you was actually higher than the Serps pension you would have received, so there was no net payment for this period.

But the different rules about how Serps and GMP are increased in retirement mean that you now receive and will continue to receive a supplement from the state in addition to your GMP.