State pension is docked £20 a week because I contracted out: Why is this happening?

I have been receiving state pension benefits since 2015. I get paid weekly and they withhold £20 towards a contracted out pension.

I have called and submitted documents related to this pension being paid, as I took the private pension around 2000, but I am told there is nothing I can do but accept this.

They make excuses every time I call or don’t tell me which department is related to my pension.

Twenty pounds a week is a lot of money to me. It’s frustrating because my wife now has cancer and kidney failure. If you could help it would be appreciated.

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Steve Webb replies: I’m sorry to hear about your wife’s poor health and also the stress you’ve been under trying to get an answer to your question.

I hope I can give you a clear answer, but I’m afraid there is a good chance that your state pension calculation is correct. ‘

I get a lot of questions about why some of the state pension is reduced because people had a company or private pension, and that is a regular source of confusion under both the old and new pension systems.

Your question raises a very specific problem: you once saved into a private pension, but this has since been cashed in. Why then does it deduct a pension for a pension that you no longer have?

To understand what’s going on here, we need to go back to what happened when you first took out your own pension.

Assuming this was an ‘outsourced’ personal pension scheme, you would have benefited from a premium discount at the time.

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You didn’t see this discount in the form of a lower NI on your paycheck, but instead the government (basically) took a portion of the NI you paid and paid it back to you through a deposit into your pension.

From the point of view of the system, for each year you were outsourced, you paid less to the state treasury.

The flip side of this is that when you retire, an amount will be deducted from your AOW to indicate that you are putting in less than someone who has not been outsourced.

The way the retirement deduction is worked out is that the DWP looks at the discount you took years ago.

At that point it was calculated how that money would probably grow (in your pension pot) and what pension (annuity) that money would probably provide you when you retire. This is the amount that will be deducted from your AOW upon retirement.

It turns out that what happened to you was something else. Instead of maintaining the pension and taking it upon retirement to supplement your state pension, you chose, as you had, to cash in your policy.

However, you still benefited from the discounts you enjoyed when the policy was live.

It would be unfair to other taxpayers if you could take advantage of NI rebates, cash out your retirement pot and enjoy the proceeds, and then see no deduction at retirement to reflect that you paid less.

While I can’t say for sure that £20 is the correct deduction, if you were outsourced for several years this would be a fairly normal amount.

You can keep asking to check the exact amount, but I’m afraid you can’t reverse the principle of a deduction for the years you paid less, even if you no longer have the relevant pension.