Why is the state pension so complicated?


Due to the wonder of BBC sounds , you can listen to Paul Lewis, Ros Altmann and Steve Webb discussing this question (minutes 2-13); it’s well worth listening to as it is full of good tips for you , your parents and your grandparents – if you are lucky enough to still have them.

It takes a lot of experience and extremely good communication skills to make the complex simple, but that’s what these three gurus do.

The program kicks off brilliantly with voices telling us their Christian names, their age and their state pension. Apparently the BBC recorded 200 of these and as Paul Lewis remarks “everyone seems to have a unique amount of state pension … which seems strange as we all have broadly similar working lives.

The reason for this – as spelt out by the architect of the “simpler” single state pension is that we are in a period of transition, with some people still receiving a combination of the old state pension and the earnings related top up (which gave a huge variety of outcomes) and some getting the new single state pension. Some people also get pension credits though Altman revealed that only 4 in 10 of those with PC entitlements claim them (a fraction that hasn’t changed since 2010).

Webb suspected that by the end of this decade, a lot of this complexity will have worked its way out of the system and the new state pension will be £2200 pa (£43 pw) more than the old one. The DWP confirmed that the gap between old and new was narrowing and was currently down to £11 a week (which seems at odds with the numbers in the previous sentence) and you sensed at this point that something was missing.

Something was missing from the conversation – contracting out!

There is a generation of people (I am in it) who will be getting an extra amount in their personal pension pot or a better company pension, because they contracted out of the earnings related pension and either paid national insurance at a lower rate or paid the full rate and got money rebated into their pension pot.

In a totally fair world, these rebated amounts – or the enhanced company pensions, would have been offset against the state pension. You could even argue that those who paid less national insurance (like the self-employed and a lot of women who didn’t get paid for the work they did) should get less pension. This money in – money out approach , while ok in principal – creates its own unfairnesses and a huge amount of extra complexity.

The good news is that women, who were mostly not getting paid because they were working as mothers or caring for others, are generally treated as “workers” under the new system. The bad news is that a lot of people who did not contract out , can rightly feel they paid a lot of money in and aren’t getting their full share of the earnings related pension they were promised. John Greenwood, editor of Corporate Advisor is one and has written feelingly on his sense of injustice.

Simplifying the problems of underpayment

The program managed to steer the conversation away from the cases of those who consciously or out of inertia, stayed in SERPS and S2P. But this didn’t stop Webb from jumping up and down about the short-changing of married women and widows who are being short-changed their pensions. The bad news is that there are reckoned to be 200,000 such people – who are due a lot of money (you can phone 0800 99 1234 to see if you or the one you care for – are one of them). The good news is that if you are over 80 and in receipt of a state pension less than £82.45, you are definitely being short-changed. Webb explained that if you are a widow and your pension didn’t go up after your husband died, you are likely to be owed money and should get more pension going forwards.

Are we growing out of the state pension?

An academically interesting part of the discussion was whether with the state pension age increasing, we are moving to a point where the state pension will be irrelevant. Many young people say they are not counting it into their planning but I said the same when I was a young person.

Lewis pointed out that though the state pension was low (relative to most other developed countries) , it still costed £100bn a year, to which there is no obvious riposte other than it appears to be money well spent and is presumably a lower cost than if the pension was higher. There is no hint that the State Pension isn’t delivering value for money to the tax-payer. Indeed work done by John Shuttleworth 20 years ago suggested that the unfunded state pension system was an extremely efficient transfer of wealth across generations.

Altmann touched on the £50bn of public money granted to private and public retirement savings by way of tax relief and Lewis pointed to our largely free healthcare system. Moving away from a universal state pension system would mean more means testing and probably a high number of people not getting entitlements who should do.

So for all its foibles, the program left us on an upbeat note. We knew better why things were complex today , we were given hope that they would be less complex tomorrow and we had it explained that if we didn’t get involved in workplace pensions, we would be missing out on a lot of free money from the exchequer. Finally, the program gave help to people who weren’t fully claiming their benefits – whether pension credits or state pension.

That’s a lot of progress in 12 minutes. Well done Moneybox and Lewis, Webb and Altmann!


It’s well worth going to the Government’s “your state pension” site. Here is what I  got when I did.

At least that’s clear! How about this



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Why is the state pension so complicated?

  1. Peter Tompkins says:

    Yes. Like you I am getting a topup to take me to the New State Pension which I wouldn’t have had if I had been contracted in. I applaud Steve Webb going for simplicity but there are many like us who have an undemanded windfall.

  2. Robert says:

    Taken from the blog…..”There is a generation of people (I am in it) who will be getting an extra amount in their personal pension pot or a better company pension, because they contracted out of the earnings related pension and either paid national insurance at a lower rate or paid the full rate and got money rebated into their pension pot.”

    As far as I’m aware, I will also be getting an extra amount in my DB pension because I was ‘contracted out’ between October 1987 and April 1997.

    A quick check on my Government Gateway online account – ‘Check your State Pension’ revealed this…..

    “The amount of additional State Pension you would have been paid if you had not been contracted out is known as the Contracted Out Pension Equivalent (COPE). The COPE amount is paid as part of your other pension schemes and not by the government.”

    There are many reoccurring conversations by some members on the Facebook ‘British Steel (BSPS2/old BSPS(PPF)) – Pensioners Group’ which suggest that ‘contracting out’ was not beneficial to them.

    The ‘contracted out’ period for employee members of the British Steel Pension Scheme was between 6 April 1978 and 5 April 1997. The State Pension which these members are entitled to is now debited to reflect the fact that their pension scheme is replacing part of it.

    Former Pensions Minister Steve Webb has previously said the following about ‘contracting out’…..

    “If you were part of an occupational pension scheme, you and your employer will have benefited for years from a National Insurance rebate, saving you money year after year, and in return your state pension is now debited to reflect the fact that your pension scheme is replacing part of your state pension.”

    “The good news for people who have been contracted out is that they are generally the ‘winners’ from the new rules which changed in April 2016.”

    “In the past, someone who had always been contracted out could never have built up more than the old basic state pension – a little over £6,000 per year – in addition to their company pension. But now, any years contributed since 2016 are added to your state pension entitlement up to a maximum flat rate of around £8,500 per year if you have enough years before you retire. This means you can still get your full company pension but also a bigger state pension than would have been possible under the old rules.”

    With regards to those employee members of the British Steel Pension Scheme who were ‘contracted out’ between 6 April 1978 and 5 April 1997, what are your thoughts on this i.e. have any of them lost out as a result of ‘contracting out’?

    • henry tapper says:

      Generally people can find 35 years of eligible years by their state pension, even with periods contracted out. The easy way to find out if you are subject to a contracted out deduction is to check out your state pension entitlement. I’ve posted an example of what you’ll get at the bottom of the blog. I was astonished to discover I was due a full state pension so long as I carried on paying contributions into my sixties.

      • Robert says:

        Thanks for adding the footnote to your blog.

        Checked my State Pension entitlement and I haven’t been subject to a contracted out deduction. This is what it says…..

        “You can get your State Pension on ** ***** 2034. Your forecast is £179.60 a week (£780.94 a month, £9,371.27 a year).

        You need to continue to contribute National Insurance to reach your forecast.

        Estimate based on your National Insurance record up to 5 April 2020 is £163 a week.

        Forecast if you contribute another 4 years before 5 April 2033 is £179.60 a week.

        £179.60 is the most you can get.

        You cannot improve your forecast any further, unless you choose to put off claiming.”

        There are no gaps in my National Insurance record.

        As for contracting out it says this…..

        “You were contracted out.

        In the past you’ve been ‘contracted out’ of the additional State Pension.

        Contracted Out Pension Equivalent (COPE).

        Your COPE estimate is £66.60 a week.

        This will not affect your State Pension forecast. The COPE amount is paid as part of your other pension schemes, not by the government.”


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