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Contracted out? You haven't lost out, says Altmann

Pensions minister Ros Altmann argues those who are contracted out are being treated 'generously' under the new state pension system.

 
Contracted out? You haven't lost out, says Altmann

Pensioners who will not receive the full flat-rate state pension due to ‘contracting out’ are not losing out and have been ‘treated generously’, according to pensions minister Ros Altmann.

Contracting out is a complexity of the current state pension system but will not be allowed under the new flat-rate state pension. The state pension, under the old system, was split into the basic state pension and the state second pension (S2P).

In the late 1980s the government encouraged workers to ‘contract out’ of S2P meaning the national insurance contributions (NICs) they paid were rebated back to their workplace pension. This was seen as a good thing as it boosted workplace pensions but what many workers didn’t realise was that they were no longer building up NICs towards the state pension.

Fast-forward to today and many pensions who have worked for 35 years or more will find they do not qualify for the full £155-a-week rate on offer under the flat-rate state pension that will coming in in April.

MPs on the Work and Pensions Committee grilled Altmann on why individuals had been sold a lie of a flat-rate pension when not everyone was guaranteed to receive the £155-a-week.

Altmann said there was a lack of understanding around how NICs and the state pension were linked.

‘One of the shocking things we discovered…was the lack of knowledge among the general public on just what the state pension is. There was a significant proportion of people who did not realise there was any link between their NI record and the state pension,’ she said.

‘Where things have gone wrong is that everybody thinks it is a flat rate £155, £156 or whatever. The flat-rate bit is the build-up, so every year in the new system you are building up [to] a flat-rate amount.’

Contracting out has meant that some people have not built up that flat-rate amount as they have not paid full NICs.

Altmann said while NIC records would be taken into account when determining the new state pension for individuals, those who had contracted out needed to recognise they had paid less towards it than a person who had never been contracted out.

‘Your old NICs record will obviously take account of the fact that you would have paid lower NI if you opted out of part of your state pension,’ she said.

‘The only reason you were allowed to pay lower NI was so that you could build up a private pension instead of the state pension you were opted out of. It simply would not be reasonable or fair to other taxpayers to say: “We know you opted out of some and you have another pension somewhere else, but we are not going to count that”.’

'Generously' treated

While those who will miss out on the full flat-rate pension may not believe so, Altmann said individuals who were contracted out were being treated ‘generously’.

Those who retire after April will have their state pension calculated under both the old and new systems and given the higher of the two amounts. ‘We will not reduce anyone below the £119.30 [a week] level’ said Altmann, regardless of whether they had contracted out or not.

On top of this, those who have contracted out still have the opportunity to build up their NIC record through continuing to work or through buying more NICs.

‘Someone who has never contracted out may have reached the £155.65 level with well under 35 years of contributions, and they cannot keep going,’ said Altmann. 'They cannot keep adding to their state pension, whereas those who were contracted out are being allowed to. There is that group, and some of them have contacted me who will reach state pension age very soon after April 2016. They will have a guaranteed minimum pension that typically will have been very generously uprated, and that is the other area…[where] the new system does help people who were contracted out.’

Martin Tilley, pensions expert at Dentons, said those who were contracted out would benefit from the added contributions that were made to their workplace pensions and were not ‘losers’ in this sense.

Not only have they benefitted from investment growth on the bonus contributions in their workplace pension, they will also be able to take 25% of the contributions tax-free on retirement, and pass the pension on to their loved ones on death – something that cannot be done with the state pension.

Tilley said contracting out may have worked out as a better option for some people.

‘The state pension is a bit like buying an annuity, you are topping up the state pension and that is great if you live a long life and you get it but if you die then [contracting out] could be better value,’ he said.

‘If you were contracted out…your [contributions] would have gone in to your pension pot and even though your state pension will be reduced down what you get [from your workplace pension] is better than what you have given up. Then you get 25% tax-free, which you don’t get with the state pension, and you can leave your workplace pension to the people you care about, which you can’t do with the state pension.’

63 comments so far. Why not have your say?

nickle

Jan 26, 2016 at 15:52

Pensioners who will not receive the full flat-rate state pension due to ‘contracting out’ are not losing out and have been ‘treated generously’, according to pensions minister Ros Altmann.

============

No they haven't. They have been ripped off.

Compare what they would have received if they had invested their NI compared to what the state offers.

it's a rip off.

What you should be asking Altmann is why the pensions are omitted from the state's accounts.

That way you can compare the before amount with the after amount to get the size of the default.

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Tony Mansell

Jan 26, 2016 at 16:15

So if you were contacted out into a PP and paid full NICS then this doesn't affect you I assume?

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FBOG2

Jan 26, 2016 at 16:22

Complete borrocks...as well she knows...if she is so certain that what we have gained is so much better than that which we have lost I'll gladly give up my gains such as they are in a straight swap for the alternative.

I've already paid in 42 years full NICs..I want the same entitlement as anyone who has paid in full NICs for only 35 years..

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S_M

Jan 26, 2016 at 16:32

They will have a guaranteed minimum pension that typically will have been very generously uprated, and that is the other area…[where] the new system does help people who were contracted out.’

Nickle why didn't you paste this part of the article? There are millions of people that are or have been in Defined Benefit pension schemes. Perhaps its a general misunderstanding of what GMP is but it's purpose is to replicate the benefits that the state would provide. It also revalues benefits broadly in line with inflation.

Agreed there are also large swathes of the population that contracted out through DC schemes or Personal Pensions from 1988. When contracting out was first introduced via this method the government gave a bonus on top of tax relief as an incentive. Now if the money has been sensibly invested it's not unreasonable to assume quite a large sum of money will have built up.

This pot of money now benefits from the new pension freedoms and can be taken as a tax free lump sum, used to purchase an annuity, put into a drawdown plan or entirely cashed out. As has been pointed out in the article it can also be passed free of Inheritance Tax to a deceased's family.

It's nonsensical to say that it's a rip off. Some people may have hundreds of thousands of pounds worth of contracted out benefits and not even be aware of it.

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Michael Stevens

Jan 26, 2016 at 16:40

It is very fair, may people always wont something for nothing.

If you Contracted Out, the N.I. contributions were reduced by 4.8%.

I paid 47 years for the same pension as those who only paid 30/35 years.

It was 44 for a man and should be increased to 40 by 2022.

The retirement age was 70 when the state pension was introduced and it should be raised to 70 by 2040

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nickle

Jan 26, 2016 at 16:40

Why?

Very simple, its a comparison because Altman claimed it was good value.

She's saying A is better than B, expecting you to not ask the question is C better than A or B? That in my opinion is deceitful.

So what are the choices.

1. The current system. You calculate the value state pension and a fair share of the total state pension debts. You total that up. If you look at the NI fund accounts, 97% goes on pensions. So that's what you get for your NI contributions.

2. The alternative. That's an investment based pension. Your money goes into a fund, and you get that at retirement.

That should be free of tax, like stamp duty, Brown's pension tax raid etc. Low charges too.

The difference between the two determines which system is better value.

For the A versus B choice. For that you need to know how much the state owed under the last system, and how much under the new. If the new is lower than the first people are being ripped off.

So what are the answers?

Well, for Mr Median, he is down over a million quid.

On the defaults, the RPI to CPI change took 15% of pensions. The raising of the retirement age 5%, without the extra years of paying in.

So I'm curious. What's a rip off?

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nickle

Jan 26, 2016 at 16:44

The retirement age was 70 when the state pension was introduced and it should be raised to 70 by 2040

==========

Why?

Take the state pension and Mr Median. His contributions are £5,008 this year. ie. In today's value of money terms, £5,008. He will have paid that for 47 years. That's quite a sum of money, just with inflation protection and no real growth.

[97% of NI goes on pensions]

The state pension is just over 6K a year. [Today's value of money again] Average life expectancy for a man if you reach 65 is just over 18 years.

That's a rip off. I leave it to you to do the multiplications.

Why would you want to make it even more of a rip off Michael?

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S_M

Jan 26, 2016 at 16:55

Nickle, what are you on?

State Pensions are paid out of general taxation not just National Insurance. You do not seem to understand the concept of GMP, hence your comments about investment returns.

As for some of your mathematics, god knows where these pie in the sky figures have come from.

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Ian Wilkinson

Jan 26, 2016 at 16:57

"There is that group, and some of them have contacted me who will reach state pension age very soon after April 2016. They will have a guaranteed minimum pension that typically will have been very generously uprated, and that is the other area…[where] the new system does help people who were contracted out.’"

The very generously uprated GMP to which you refer (pre 1988), has, you omit to mention, from April this year, been denuded of its indexation increases which previously have been paid by the State.

This means, as I age, I will become progressively poorer; what kind of great pension scheme is that?

No Briton who has reached the end of his/her working life deserves this treatment.

Do MPs and Ministers have pensions which have a built in poverty generator?

To quote a contibutor; "this is retrospective confiscation" and is scandalous.

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nickle

Jan 26, 2016 at 17:02

State Pensions are paid out of general taxation not just National Insurance.

===========

No. They are just paid out of NI.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/269301/National_Insurance_Fund_Account_2012-13_Great_Britain.pdf

For the fund accounts.

It's hypothecated for pensions and a few other entitlements.

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nickle

Jan 26, 2016 at 17:03

To quote a contibutor; "this is retrospective confiscation" and is scandalous.

===============

Yep. The reason is that its an unfunded pension. No assets.

No assets doesn't mean no debt.

You paid and you are owed a pension.

What's going on here is that the state is welching on its debts.

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Law Man

Jan 26, 2016 at 17:06

Baroness Altmann is disingenuous and misleading, to put it mildly.

There were two versions of how our "contracted out" payments could be used:

If you were employed and in a company pension scheme, the pension company took the responsibility of paying at least the "Guaranteed Minimum Pension". This is at a comparatively generous rate, and so the employee may not suffer any loss, or comparatively little.

Otherwise you directed that the payments went into a personal pension policy. You use the final fund to buy an annuity. The growth in the fund depends on investment performance.

In the second case, for almost everyone, the final fund will buy an annuity of far less than the reduction in the state pension. My own such fund will buy an annuity equal to about one-half of the reduction in my "£155 pension".

Baroness Altmann must know this; if otherwise she is not fit to be the minister.

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Sinic

Jan 26, 2016 at 17:24

I remain delighted that I had the option to opt out, pleased that I was given the freedom to invest my opted out funds as I chose, pleased that I was able to take a 25% lump sum tax free, pleased that the remainder (invested in my SIPP) can be passed on to my family, pleased that I have the freedom to reduce/increase my annual pay outs according to my needs and priorities. None of this would have existed under the state system. As for those who suggest that almost everyone is worse off having opted out, this depends on the accuracy of your judgement, your investment decisions and perhaps your good or not so good fortune. I would be grateful if any one of you disgruntled malcontents can provide the equation/formula which provides evidence that 'almost everyone' will be worse off if they opted out. More fool those who have opted for a standard annuity rather than retaining control over their funds in a SIPP.

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Keith Cobby

Jan 26, 2016 at 17:58

So the flat rate is in fact £119.30.

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Maverick

Jan 26, 2016 at 17:59

Speaking as a pensions lawyer, most of you lot have got it completely wrong.

If you are lucky enough to be a member of a defined-benefit scheme, the scheme pays the GMP, not the government.

If you are in a defined-contribution occupational scheme, your scheme pays the GMP, having been given a rebate by the government.

If you contracted-out into your own personal pension, and you feel you have lost out, well to a large extent that's your fault for making lousy investment choices.

The GMP is, and always was, an underpin, not a pension in itself.

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Maverick

Jan 26, 2016 at 18:04

Law Man - You don't have to buy an annuity. You haven't had to buy an annuity since April 2006.

If you want to, fine. But don't blame Baroness Altmann if you think the annuity is bad value.

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Law Man

Jan 26, 2016 at 18:13

Thank you to those who provided the information on the National Insurance Fund.

In the year to 31/03/14 the NIF paid out £82.552 milliard (thousand million) by way of pensions from total payments of £88,933 milliard = 92.8%. For income, NIC paid in c. £82.236 milliard. So we can say that NIC just about equals state pensions.

Maverick: Thank you for the confirmation. At the time I contracted out to a non-employer personal pension policy, I recall there were 3 insurers actively promoting "contracted out from SERPS policies", which were (and remain) 'with profits'.

30 years later I realise with profits policies have a poor performance record; but I was not aware of any alternative, and at the time the prevailing wisdom was with profits are a good thing. I would be interested to know what proportion of the total "contracted out from SERPS policies" taken out in the 1980s are with profits: over 90%?

For myself it does not greatly matter, but for some people a reduction in income of £2,000 p.a. or more is significant.

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Law Man

Jan 26, 2016 at 18:17

Maverick: just seen your second, thanks.

Indeed, I shall transfer the fund into my SIPP and hope to do better than an annuity.

However, a "like for like" comparison with a guaranteed pension rising with inflation plus is an index linked annuity. If you just about have enough income on which to live, you are unlikely to want to take a risk or to have the sophistication to make your own investment choices. Not everyone is as fortunate as you and I are.

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nickle

Jan 26, 2016 at 19:05

Speaking as a pensions lawyer, most of you lot have got it completely wrong.

==================

OK. Here's my question to you.

The state omits pension debts from its accounts.

FRS102 says pension obligations are on the balance sheet.

That gives a misleading impression.

The state tells people to buy back years. [Clearly not a tax].

Is that fraud under section 2, 2006 fraud act?

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nickle

Jan 26, 2016 at 19:08

In the year to 31/03/14 the NIF paid out £82.552 milliard (thousand million) by way of pensions from total payments of £88,933 milliard = 92.8%. For income, NIC paid in c. £82.236 milliard. So we can say that NIC just about equals state pensions.

==============

Pretty much.

So there are two sets of accounts that matter.

1. Income and expense.

You've the details in full.

2. Balance sheet or assets and liabilities.

NI fund lists the 'assets'. Why has it omitted the liabilities?

The last estimates are here.

http://www.ons.gov.uk/ons/dcp171766_263808.pdf

Levy (2012) explains that the last official figure for the state pension schemes’ obligations was

produced by the Government Actuary’s Department (GAD), as at 31 March 2005, at £1.347 trillion,

In summary, the estimates in the new supplementary table indicate a total Government pension

obligation, at the end of December 2010, of £5.01 trillion,

=================

So look at the size, look at the rate of growth.

Now you can understand why the state is taking the axe to its pensions.

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PaulSh

Jan 26, 2016 at 22:11

@nickle, if the state had acted when it became obvious to anyone involved in the pensions industry that the state pension was unsustainable in the long term, it might have taken something less drastic than an axe to it and still kept something of value.

As for my personal position, as far as I understand it at the moment, the periods when I was contracted out (around half of my working life) have effectively wiped out my entire remaining SSP contribution record. The fact that the money I received from the government went into the Equitable Life is a double irony.

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nickle

Jan 26, 2016 at 22:22

Paul, it would have had to move to a funded system, and a guarantee for the state pension for those that run out of money in their fund.

However, my view is that its too late for that.

So look at their strategy, and Altman is in the thick of it.

1. Blame longevity. Ie. the victims are to blame for the temerity of living too long.

Not that its longevity. Mr Median would have had 840K in a fund. Instead he gets a pension worth just over 100K, and 400K of debt. He's down a million. If he had the fund, longevity wouldn't be an issue.

So funded - no longevity problem. Ponzi - longevity problem. In other words its not longevity, its the ponzi nature.

2. Increase the retirement age. That's a quadruple whammy. You lose payouts. You are forced to pay in for longer. You lose any investment on either. About a 6% cut per year of increase. It also disproportionately hits at the poor who die younger

3. RPI gone to CPI. 15% cut.

4. Loss of GMP.

5. The MIG. Camerons 140 a week is the level of the MIG. Anyone below that gets nothing.

6. Increased payments in, mainly on the employer's NI side.

Here's my prediction going forward.

1. Means testing.

2. Like with care home costs, to get your pension, you have to put your property on the line.

3. They will look around and ask, where's the cash? Oh its in pension funds. Hmm they are badly managed, lets have those. It's happened in Europe and the EU looked the other way.

For a good example of this, look at Boris. He wants to loot local government pension funds [50% of liabilities in assets. 50% black hole] and force them to invest in things like HS2. No one else will, so he's going to do that. Then they will screw the pensioners there.

Or they will say, look you've 120K in a fund, you are rich, lets have 20K of that. But 120K won't even buy you a state pension income. You can see how Altman and co will phrase it.

Sorry but when you owe 9,200 bn because you cooked the books, those involved and those that covered up need jailing for life.

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Kenneth

Jan 27, 2016 at 09:55

Let me start off by saying I am receiving my state pension so am not affected by the changes to the new state pension.

I have worked in pensions alll my life and used to deal with contracting out.

When I was reading the Green and White Papers I noticed that there was no mention about what would happen to cost of living increases normally paid by DWP via the state pension. I wrote to Steve Webb and DWP and was told that the DWP do not or have never paid GMP increases.

I know that this is not correct because as I am on state pension see my state second pension going up by more than inflation. I started off with about £4 pw state second pension in 2005 and it has now reached about £30. There is no way it could have increased from £4 to £30 if it did not include increases on my GMP normally paid by the state..

Because I was not getting anywhere with Steve Webb I wrote to the Chair of the Public accounts committee in January last year and received a letter from Margaret Hodge the then Chair mentioning that the Government were not telling people about loss off GMP increases and other changes such as inherited rights and reduced future accrual for people who are contracted in to the state second pension. In the letter it mentioned that The National Audit Office (NAO) agreed were going to investigate the problem of why the Government did not admit to paying GMP increases or were not telling people about changes that will make most people worse off such as lack of GMP increases, future accrual rate, 10 year rule and inherited and derived rights.

The first report from the NAO is due out early February will be about lack of information about GMP increases and a more detailed report a couple of months later about the other points I mentioned..

When Frank Field was appointed chair of the Work and Pensions Committee I wrote to him about my concerns and sent him a copy of the letter I received from Margaret Hodge which mentioned the NAO were investigating the Government were not telling people about major changes to the state pension.

Because of this letter I think it made him start his own inquiry into lack of information about the new state pension.

As far as I am aware the Government have not contacted anyone to bring it to their attention that many people will receive less state pension under the new state pension..

This all seems very strange to me as when they were due to change inherited SERPS from 100% to 50% in 2000 the DWP forgot to mention it in their booklets until Age Concern contacted them about 1998.

Because of the lack of information mistake the Government postponed the legislation for just over two years and did not let it affect people over state pension age. When it started in October 2002 they also introduced a sliding scale of reduction over a further eight years which expired in October 2010.

At the time it all happened Mr Darling was the Minister and he promised that such a mistake would never happen again. He said people were entitled to know about major changes well in advance and that the information they receive would be full and accurate.

What a short memory the Government have.

The Government and DWP have failed on all counts as they are refusing to write to people with any information about the changes.

When they inherited SERPS fiasco happened they wrote to 20 million people telling them how they would be affected.

Everyone reaching state pension on and after 6 April 2016 should write to DWP asking for compensation if they are going to be made worse off .

Two of my friends have complaints in with the Parliamentary Ombudsman about not being told about change in legislation.

I just cant understand how this got past the Work and Pensions Committee who should have pointed out to the Government that people would require more than two years notice to plan for the losses.

It is now turning out to be that people will not be receiving any advance notice of the changes that make them worse off.

I hope you all write to your MPs complaining about the lack of information being given to the public by the Government about the biggest change ever to the state pension system and also asking them why they voted for it if they did realising people were not being given much or any advance warning.

In my opinion it went through on the nod as not many MPs understood what they were voting on.

This may turn out to be the biggest case of maladministration ever, due to the way the Government are not telling people about the changes..

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Maverick

Jan 27, 2016 at 12:42

Kenneth - I am afraid "a little learning is a dangerous thing".

GMP has no actual connection whatever with state second pension. GMP is paid by an entirely separate pension scheme - either an occupational scheme, or a personal pension which you would have set up. GMP was intended, when it started, to replace a part of the State Earnings-Related Pension (SERPS), but it was not part of SERPS and was not paid by the government.

However much we may regret it, the government has the power to change state benefits going forward. If you are receiving a state second pension I would query whether you have any legal standing to complain about GMP.

The government cannot possibly commit to telling everyone about all changes to legislation. I don't want my inbox full of government spam about a new 20mph limit in Acacia Avenue, Slough . . . .

Anyway, ignorance of the law is no defence. That may be tough, but there it is.

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Maverick

Jan 27, 2016 at 12:47

Nickle - My answer is :

The state pension is not a funded scheme.

Therefore there can be no debt.

I am (to my utter relief) no accountant, but I rather doubt whether the state's accounts are subject to FRS102.

No, it's not fraud. It's how it is. Get over it!

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ND

Jan 27, 2016 at 14:42

Maverick,

GMP does have a connection with the Additional State Pension in that inflation indexed increases not covered by the scheme with the GMP -- all of it for pre88 GMP and >3% for post-88 -- are provided by the ASP. I.e. the ASP tops up the GMP to give you (in theory at least) the same as if you hadn't contracted out.

Now, under the current system inflation is applied to your *gross* ASP and your GMP (well, COD) is subtracted from that to arrive at the net ASP you'll get for the year. However, under the transition rules to the new system, your *net* ASP will be "fixed" into your foundation amount, and that's what'll be increased each year. That'd be fine if your GMP went up by the same rate, but it won't, being capped at 0 & 3% for pre & post-88.

(I do agree though that the way Kenneth has explained it isn't right).

Kenneth,

Are the letters and the responses available somewhere online, and if not can they be made so?

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Kenneth

Jan 27, 2016 at 16:35

Maverick

As you say the Government don't have to mention all changes in law. Do you really believe they should not tell you about changes to state pension.

You should have a look at various reports done about the DWP failing to tell people about reduction in the inheritance of SERPS from 100% to 50% where they were made to put of the change for two and a half years and not let the change affect people over state pension age. They were alsio made to introduce a sliding scale of reduction over a further eight years. This was all because the DWP forgot to tell people about a change in legislation that was announced about 15 years before it was due to come into force in 2000.

Improving Service Quality: Action in Response to the Inherited SERPS Problem

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

HC 497 Session 2002-2003: 20 March 2003

https://www.nao.org.uk/wp-content/uploads/2003/03/0203497.pdf

ND has given a good explanation about how the sate additional pension are connected after you reach state pension age.

If you are in a contracted out pension scheme have a look at the booklet and tell me what it says about who pays pre 1988 GMP increases and who pays increase in excess of 3% on post 1988 GMP.

Have a look at DWP booklet NP 46 a guide to State Pensions page 51/52

Protection against inflation

Each year the part of your pension earned from 6 April 1978

that replaces additional State Pension will be reviewed to ensure that

it is protected against inflation.

Occupational pensions built up before 6 April 1988 will have all the

increases needed to keep up with inflation added directly to your

additional State Pension.

Occupational pensions built up from 6 April 1988 to 5 April 1997

and personal pensions built up from 6 April 1987 to 5 April 1997, will

be at least partly protected by the scheme. The rate of increase will

be 3%, or equal to the rate of inflation if this is less. The rate of your

additional State Pension will be increased by any amount that

inflation goes up above 3%.

http://www.pensions-advice.me.uk/pdf/np46/np46apr04.pdf

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Kenneth

Jan 27, 2016 at 16:56

ND

The letter I received from Margaret Hodge is not on line. I can' cut and paste it. If you want a copy I would need your email address .

You can see my freedom of information requests about GMP increases if you go into a freedom of information web site called "what do they know" if you enter CTthompson it should pull up all my requests. You could also put in GMP increase.

I have managed to get several newspaper articles done about non payment of GMP increases that I can send if you wish as well as other links to articles about non payment of GMP increases via the state pension.

I would like an explanation from Maverick how my starting AP of about £5 grew to about £30 in ten years if it did not incude an increase on something else.

I also have a very god letter from HMRC explaing how my GMP increases is worked out over a ten year period which mentions pre 1988 GMP increase is paid by DWP .

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nickle

Jan 27, 2016 at 18:33

The state pension is not a funded scheme.

Therefore there can be no debt.

=============

What a bizarre argument.

Look lend me 10 million, and I'll spend it. The debt's not back by assets, so it doesn't exist.

Really? What an awful argument.

What next? How you pay your debts means you don't owe money. If you a prostitute, drug dealer, or government then you don't have to pay your mortgage?

It's simple.It's a debt.

The definition of a debt or liability is as follows.

If you have received something of economic value in the past and agree as a consequence to deliver something of economic value in the future you have a debt.

Or how about this challenge.

Get up in a room of civil servants and announce their pensions are canceled because they aren't a debt .See if you get out alive.

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nickle

Jan 27, 2016 at 18:33

The state pension is not a funded scheme.

Therefore there can be no debt.

=============

What a bizarre argument.

Look lend me 10 million, and I'll spend it. The debt's not back by assets, so it doesn't exist.

Really? What an awful argument.

What next? How you pay your debts means you don't owe money. If you a prostitute, drug dealer, or government then you don't have to pay your mortgage?

It's simple.It's a debt.

The definition of a debt or liability is as follows.

If you have received something of economic value in the past and agree as a consequence to deliver something of economic value in the future you have a debt.

Or how about this challenge.

Get up in a room of civil servants and announce their pensions are canceled because they aren't a debt .See if you get out alive.

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Maverick

Jan 27, 2016 at 18:33

Guys - I repeat :

GMP is paid by a pension scheme.

State pension is paid by the state.

There is no actual connection between the two.

Nothing is done secretly by the government in increasing GMP. It is all set out in statutory instruments, which, if not available online, can be bought from Her Majesty's Stationery Office. Putting in a freedom-of-information request is a waste of time and effort.

As a pensions lawyer with 20+ years' experience, all I can say is, beware of constructing complicated arguments on inadequate information. Find out all the information first, then make your argument. And what HMRC tell you in letters, or what DWP put in booklets in 2004, is not the law and would not support any sort of claim.

Lastly, I ought to point out there is such a thing as a limitation period. For this sort of stuff it would be six years.

Don't waste your time, guys. I'm sure you've got better things to do.

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Maverick

Jan 27, 2016 at 18:54

Nickle - Well, there's no way I'd lend you £10 million without taking legal security, probably worth £20 million . . . .

The state pension is, as you well know, a pay-as-you-go scheme. HMRC collects in your taxes and National Insurance contributions, lumps them all together, and pays state pension out of the pot. And pays the National Health Service, social security benefits, overseas aid, etc etc etc. There is no actual hypothecation of National Insurance with state pensions, whatever you may have been told.

So state pensions are no more of a debt than social security payments are. In a perfect world the government would balance its books, Google and Amazon would pay rather more tax on their profits, and we'd all be happy.

The only time a pension turns into an actual debt is when the person paying the pension goes bust - that is, a company goes into liquidation. That is hardly likely to happen with Great Britain - otherwise all those millions of people funding their pensions with UK gilts are going to be very surprised . . . .

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nickle

Jan 27, 2016 at 19:09

* The state pension is, as you well know, a pay-as-you-go scheme. HMRC collects in your taxes and National Insurance contributions, lumps them all together,

Your first error. It's hypothecated. It's not lumped together.

Here are the accounts.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/269301/National_Insurance_Fund_Account_2012-13_Great_Britain.pdf

NI pays largely for pensions (97%). The rest goes on some entitlements.

So there is hypothecation.

* So state pensions are no more of a debt than social security payments are.

Social security payments are too. But there's a big difference. You pay for example for JSA via NI. That only last 6 months. The state can change the rule not to accept NI for JSA and after a year and a half, the debt is gone. The debt bit is the expected payouts under JSA.

* Google and Amazon would pay rather more tax on their profits, and we'd all be happy.

Deluded. The reason is that you don't know how much they owe, so you can't tell if Google and Amazon can fund the debt.

Or they pay a quid. That covers all the pension payments, happy every after.

* The only time a pension turns into an actual debt is when the person paying the pension goes bust -

Not the case. The debt is wiped out on bankruptcy.

Governments regularly go bust, even fiat issuing countries.

So why is the state defaulting on the debt, unilaterally? It owes too much to pay.

* That is hardly likely to happen with Great Britain - otherwise all those millions of people funding their pensions with UK gilts are going to be very surprised . . . .

They will be. But I suspect gilts are the last to go. The will try and borrow more first, and they need gitls.

So for example, why not convert the state pension to a funded one, by issuing gilts pari parsu with existing ones.

No change is there?

[My bet is you will give the game away with your reply]

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Kenneth

Jan 27, 2016 at 19:14

Maverick,

Do you know why public service schemes have to start paying the increases on all of persons GMP when they.emigrates to a country where the state don't pay GMP increases on state pension and stop paying the increases if the pensioner returns to the uk..

If you are so confident in your argument please answer my previous question about how my additional state pension paid by the state increases from £5 to £30 in 10 years.

And why the National Audit office and the Work and Pensions Committee are now investigating the DWP regarding not telling them about not doing the calculation to work out a persons additional pension by which they receive an increase equivalent to the pension not being increased by their pension scheme. Also explain why occupational pensions stop paying increases on a persons pre GMP when they reach state pension age.

If people don't try to campaign , how do you think changes happen.

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nickle

Jan 27, 2016 at 19:27

Well, there's no way I'd lend you £10 million without taking legal security, probably worth £20 million . . . .

===============

So I spend the legal security, and its an unfunded debt. Oh sorry, if its unfunded its not a debt, I don't owe you.

That's what you've said.

But equally, I've not declared I'm bust, so its not a debt either. Again from what you've said.

So I'm intrigued.

What's your definition of a debt, because mine and the accountants is obviously different?

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ND

Jan 27, 2016 at 19:41

GMP is paid by a pension scheme.

State pension is paid by the state.

There is no actual connection between the two.

----------------------------------------------

The last Minister of State for Pensions disagrees with you:

"Additional state pension and GMPs are linked in that when a person reaches pensionable age, the total amount of GMP is subtracted from the total amount of additional state pension built up between 1978 and 1997, and any net amount is paid." http://www.theyworkforyou.com/wrans/?id=2014-01-06c.181793.h

And the FT:

"When the employee retired, the employer paid the GMP, but the inflation increases on GMP were covered by the government and added to the state pension." http://www.ftadviser.com/2014/06/04/opinion/tony-hazell/dwp-s-orwellian-pensions-move-is-rather-sinister-OBV42u7b9Ovbz4QFn49RYJ/article-0.html?ftar=true

Oh, and every other source I've looked at too -- including the pension statement from my own occupational scheme.

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ND

Jan 27, 2016 at 19:52

Kenneth,

Ah, that was you :-) I'd seen those FoIs before....

Why don't you put the letter up on some file sharing site, and post all the links to articles you mention, so that folks puzzled by all this can read some more authoritative sources that just some anonymous guys having a back and forth on a comments thread.

Oh, and please do post back here when the NAO report(s) come out.

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Kenneth

Jan 27, 2016 at 20:32

Hi ND,

I would like to bring to your attention that if you go unto the web site for the Work and Pensions inquiry into Understanding the new State Pension inquiry and click on the written evidence view all it will bring up all the evidences submitted, some of which you will find interesting and then click onto it will open my submission. If yo go to the end then click on annex letter which is from HMRC to me explaining how they work out my GMP and who pays the GMP increase. If you read the second page you will see that it mentions GMP increases are divided between the state and occupational scheme.

If after reading it please come back and tell me what you think

Mr Christopher Thompson - written evidence | PDF version (PDF84 KB)

Opens in a new window USP0017

20 November 2015

If I had not written to Margaret Hodge these investigations would not have been done.

I received the reply just before Parliament disbanded for the election last year.

I think it was a parting gift on giving up being chair of the Public Accounts Committee to stir it up for the next committee. That is just my feeling.

When the NAO produce their report on GMP increases I think it is given to the Public Accounts Committee to look out to decide if they should have a public inquiry.

The NAO are also doing another report on the lack of information available to the public about the changes happening under the new state pension that make them worse off .I was told that this will be about two months later.

Look forward to hearing from you.

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Maverick

Jan 27, 2016 at 23:04

ND, Nickle and Kenneth - You are mixing up how the amount of the additional state pension is calculated with which party has the legal responsibility to pay it.

Well, good luck with your litigation, guys. I hope you have big pensions to pay for it.

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nickle

Jan 27, 2016 at 23:29

Sorry, there's some information I'd like, if you can answer.

On the debt front is it that you don't like the word debt, and would prefer liability or some other word?

What in your mind, is a debt? What definition are you using, because I suspect that goes to the heart of why you think the state pension, civil service pension, perhaps any pension isn't owed to people who have paid in?

I'm genuinely intrigued, because if I knew perhaps I can approach it in another way?

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Kenneth

Jan 28, 2016 at 11:29

Maverick.

If as you say you have been a pensions lawyer for over 20 years. Why have you and all other legal advisers allowed your clients pensionscheme booklets to mention that the state pays part of their GMP increases after they reach state pension age.

Are the legal profession going to tell their clients to remove the wording about state paying GMP increases and to tell them that the advice given to them from legal departments since April 1978, the start of contracting out was incorrect.

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Maverick

Jan 28, 2016 at 13:48

Nickle - A pension (any pension, whether occupational, personal or state) is a legally enforceable promise to pay a succession of fairly small monthly payments from the time you start it till the time you die.

It doesn't matter a great deal where the money comes from. In the case of an occupational pension, the responsibility remains with the pensioner's ex-employer, and if the money in the fund runs out the employer would have to fund the payments from its own resources. In the case of a personal pension the responsibility is yours, and if the money runs out before you do that's tough.

In the case of the state pension the Treasury collects all the taxes and pays the pensions out of that pot.

Looking at a pension as a debt effectively means lumping together all the payments from now till you die and saying they are all due now. That isn't how pensions work. For a start, you don't know how long you'll live. You don't know how the investments your pension fund is invested in will perform in future. You don't know how many of your members will want to transfer out into their own SIPP. So looking at a pension fund as a debt is conceptually wrong.

In the case of state pensions there is no fund. So how do you calculate a debt, and why would you need to? That's not how state pensions are structured.

You should, as you suggest, approach pensions in another way.

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Maverick

Jan 28, 2016 at 13:55

Kenneth - Two points here :

All (or almost all) pension scheme booklets have a paragraph saying that the booklet gives a rough guide to the benefits of the scheme, but that the scheme's trust deed and rules are the legal framework which govern the scheme, and the trust deed and rules have precedence.

All the pension scheme booklets I advised on contained correct information. I can't speak for the rest of the 300 or so pensions lawyers in the country.

As I said, get the right information. Don't waste your time worrying about what a booklet says.

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nickle

Jan 28, 2016 at 14:20

Nickle - A pension (any pension, whether occupational, personal or state) is a legally enforceable promise to pay a succession of fairly small monthly payments from the time you start it till the time you die.

============

Correct. It is legally enforceable. If the state decides not to pay your state pension, you can go to court to get it enforced [unless it changes the so as to default]

============

It doesn't matter a great deal where the money comes from.

============

it does. The money has in the case of the state pension to come from the public. If they can't afford it, the state can't.

===========

In the case of the state pension the Treasury collects all the taxes and pays the pensions out of that pot.

===========

No, its hypothecated and is paid out of NI. It's not paid out of taxation. Taxation is true for the civil service pensions.

===========

Looking at a pension as a debt effectively means lumping together all the payments from now till you die and saying they are all due now.

===========

No. You do that for all the pensions, taking account of the increases [eg Inflation]. You then know from life expectancy, that you won't have to pay all of them because people die off. So you adjust. That's the future value, and its not a meaningful thing. What you need is the present value of those expected payments, so you discount them.

ie. D(t) - the discounted value of £1 in t years time.

P(t). The future payment you would have to make if people were alive.

L(t), The probability that the person to whom you are going to make the payment is alive.

You sum D(t) * P(t) * L(t) for everyone's past (imporant) payments in.

That's the actuarial value that you should book in the accounts to adhere to the accounting standards.

[ For a start, you don't know how long you'll live.]

But the state does know with a high degree of accuracy how long the cohort, the people to whom it owes money, will live.

So what does that debt number tell you?

1. The intergeneration transfer. How much is dumped on the young.

Why shouldn't they know?

2. If its affordable. The size of the debt and the annual payments are related.

3. The annual rate of increase in the debt. Tells you again if its affordable.

Just because there are no assets, doens't mean people aren't owed a pension and the debt doesn't exist.

A bit like arguing that someone with a mortgage on their house with negative equity doesn't owe a penny.

ie. How you pay, the existence of a fund, doesn't mean the debt does or doesnt exist.

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Kenneth

Jan 28, 2016 at 16:24

Maverick,

I do realise scheme's trust deeds and rules are the legal framework which govern the scheme, and the trust deed and rules have precedence. but the pension scheme booklet issued to the scheme members should not mention that when a person reaches state pension age that the state pension takes over the responsibility of paying some or all of their GMP increases if this is not correct giving people incorrect information

Can you send me a copy of the wording used in one of your scheme booklets that you have worked on explaining how and who pays the GMP increases up to state pension age and what happens to the GMP increases when they reach state pension age and if any are in the public domain point me to how to find them on the web.

Every single public service scheme booklet I have seen on the web mentions State pays GMP increases after a person reaches state pension age. . Can you mention a single one that does not.

I do know that some schemes pay the GMP increases after a person reaches state pension age so the members receive the GMP increases twice. For example the BBC pension scheme booklet. which can be found on the web.

I assume you know that in July 2009 the National Audit Office did a report

HC: 878 2008-2009

about public service employees receiving their GMP increases twice.In paragraph 4 it said

4 Prior to state pension age, public service pension

schemes pay annual cost of living increases on the whole

of a person’s occupational pension. After state pension

age, however, responsibility for paying increases on the

Guaranteed Minimum Pension element is split between

the pension scheme and the state. Overpayments occurred

where pension schemes did not have Guaranteed

Minimum Pension information recorded on their systems,

and so continued to uprate the whole pension. The people

affected therefore received part of the uprating in their

Guaranteed Minimum Pension twice – once (correctly)

from the state as part of their state pension, and once

(incorrectly) from the pension scheme.

I assume you are going to tell me that this is not correct even though it would have been put past their legal department using people like your self.who specialise in pension law.

How can they say it was paid twice if it was not being paid by the pension scheme and the state pension. Notice they also mention paid correctly by the state.

It was the occupational schemes that had to stop paying the GMP increases not the state pension because the occupational pension forgot to stop paying them when a person reached state pension age. This affected over 90,000 people.

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dd

Jan 28, 2016 at 16:30

Thank you Kenneth, re yours of yesterday including this and of course the work behind it:

"In my opinion it went through on the nod as not many MPs understood what they were voting on.

This may turn out to be the biggest case of maladministration ever, due to the way the Government are not telling people about the changes."

I am sure you are right. I am imagining what they would say if it were a private company not informing clients of changes to an insurance policy for example.

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Maverick

Jan 28, 2016 at 17:56

Nickle - This would mean that you regard all your electricity bills, gas bills, council tax bills, water rates, phone bills, etc etc etc, from now until you die, as being your immediate debts. How do you sleep at night?

Sorry to appear flippant, but a liability only becomes a debt when the part that has actually become due for payment is due. As I said, get the correct information first, then put your case together.

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Maverick

Jan 28, 2016 at 18:09

Kenneth - I am now retired, and as part of the retirement process, had to give back to my employer all the information I was holding on my employer's clients. Normal for retirees.

So I can't give you any actual examples.

I would beware using public sector schemes as examples. Their administration is notoriously poor. But in most cases their governing documents are statutory instruments, not their scheme booklets.

Forgive me saying so, but haven't you rather gone off the point? I can't see any actual injustice here. Is anyone actually getting less GMP than they are legally entitled to?

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nickle

Jan 28, 2016 at 18:17

Nickle - This would mean that you regard all your electricity bills, gas bills, council tax bills, water rates, phone bills, etc etc etc, from now until you die, as being your immediate debts. How do you sleep at night?

==========

no it doesn't.

Here's my definition, and its the accounting one.

If you have received something of economic value in the past and agree as a consequence to deliver something of economic value in the future you have a debt.

So lets apply that to your electricity bill example.

First does the electricity have economic value? Yes. Economic value covers goods, services and money.

Next are there two legs? Yes. Money exchanged for the 'leccy

Are they connected transactions? Yes. I get the electricity in exchange for the money.

Now where it fails. Did I pay for the electricity in the past? No. It's not a debt.

Same with all your other examples, unless you've paid in the past. If you paid up front in the past, then yes, the other party owes you the goods, services or money.

So you've given some examples. Let me give you some examples.

You have an account with a electrictiy company. You are 100 quid in credit. You've paid in more than the electricity you have got out. You have an asset, the electricity company a debt. [Money against a good]

Borrowing is the obvious example. You give money to the borrower and as a consequence they agree to give you money back in the future. It's a debt. If you are just thinking,hmmm, should I lend the money, no debt exists. Both legs in the future. [It's identical to the pensions]

Or you work for an employer. You get paid in arrears. At the end of the month, you are owed money. You have the asset, they have the debt.

So I'm still interested, you've given some examples, but they aren't debts. All the legs are in the future.

So again I'm still interested in your definition.

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nickle

Jan 28, 2016 at 18:29

Sorry to appear flippant, but a liability only becomes a debt when the part that has actually become due for payment is due. As I said, get the correct information first, then put your case together.

=================

So if you have a mortgage its a debt. You are liable to pay for it. If you look up in a thesaurus, they are synonyms.

So what you seem to be saying is that even though you borrowed half a million, you've only got a debt of a monthly payment or zero?

That doesn't make sense.

You seem to be confused over the size of the debt, and the cost of servicing that debt.

hence the question as to your definition, not examples.

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Kenneth

Jan 28, 2016 at 20:02

Maverick

As far as I can see I am not off track as it is all about Ros saying Contracted out? You haven't lost out, says Altmann.

I am trying to prove they are losing out. I keep coming up with official Government web sites mentioning that a person does receive some of their GMP increases after they reach state pension age via state pension and yet you won't say if they are correct or not or even let me have a copy of the wording from one of the pension schemes booklets you gave advice on. If you are in a contracted out pension scheme send me a note of what it says in your own booklet.

You are being rather damming about your profession if you say you can't trust what public service pension scheme booklets show that have been drawn up by specialist pension lawyers like yourself

Simple question for you to answer . Two people with exactly the same service and contracted out pensions. The first reaches state pension age on 5 April 2016 and the second on 6 April 2016. Will you please say if the person who reaches state pension age on 5 April 2016 will be better or worse off over the course of their retirement once they start receiving their increases on their state and occupational pensions and are added together..

It seems very strange to me that you are happy to see people being made worse of by not receiving increases on part of their state pension after contracting out ceases and not being told well in advance so that they could plan for the loss on 6 April 2016,

One more important link to the Civil Service Pension scheme produced by The Cabinet Office in April 2014 which mentions on page 2 the following

If you study it and look at page 3 you will see that it says

"When you claim your State Pension, we work PI out differently. This is because the Government pays the increase on the GMP part of your pension with the state pension. It then mentions the GMP consists of two elements Pre 1088, where they say the Government will normally pay the increases on your GMP with your state pension and that fo post 1988 service any increases above 3%.

I suppose you are going to say this is not correct either so they are misleading their pensioners which also includes MPs who are members of one of the Civil Service pension schemes

http://citywire.co.uk/money/contracted-out-you-havent-lost-out-says-altmann/a876216?ea=274071&utm_source=Watchlist_C

Just give me one bit of proof to prove what you say is correct and that people don't have any of their GMP increases paid via the state pension.

Also please explain how a £5 additional state pension becomes £30 over a period of 10 years for a person who was contracted out all their working life.

If all these Government documents are not correct they have a serious case of maladministration for misleading their staff regarding who pays the GMP increases

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Thrugelmir

Jan 30, 2016 at 09:24

Why are people so ungrateful these days. Everything is assumed to be a right. With the baby boomer generation hitting retirement something had to be done. I'd love a gold plated pension. Try living through Equitable Life and fluctuating investment returns. You don't know what you've missed sitting in ivory towers.

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Pat Strong

Jan 30, 2016 at 09:31

I haven't been following this link, just spotted today. I have to say something in response to Maverick.

"If you are in a defined-contribution occupational scheme, your scheme pays the GMP, having been given a rebate by the government.

If you contracted-out into your own personal pension, and you feel you have lost out, well to a large extent that's your fault for making lousy investment choices.

The GMP is, and always was, an underpin, not a pension in itself."

You are confused! The GMP, whilst part of the occupational scheme is indexed after a SPA by the scheme and the state. Dependent on whether it is pre or post 1988. This was confirmed by stave Webb when he gave evidence to th work and pensions committee recently, re-confirmed by Ros Altmann and is now on the DWP leaflets on the Gov.uk website. The generous revaluation is nothing to do with indexation increases once in payment. I would have expected Maverick to have understood that, it's fairly basic.

The GMP is and never has been paid by the state (unless a scheme winds up).

no one is arguing that the state should pay the GMP.

The indexation increases currently paid by the state will cease.

The gov. Have kept quiet about this until recently and until they were forced into telling the truth.

This will cost individuals up to £23,0000.

Ros Altmann Talking about GMP Revualtion to the work and pensions committee was a red herring and used to say those with GMPs have been well treated. It is absolutely totally irrelevant. If Ros Altmann knew anything about pensions, she wouldn't say this.

Kenneth, I have checked your sources and you are 100% correct, thank you.

Pat

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Peter Paddon

Jan 30, 2016 at 10:13

Maverick

The government cannot possibly commit to telling everyone about all changes to legislation. I don't want my inbox full of government spam about a new 20mph limit in Acacia Avenue, Slough . . . .

But there's a difference between something that affects a miniscule percentage of the population and something else that affects a substantial percentage.

I think we all know why the government didn't make better efforts to educate people on these changes. I think it ranks alongside being a good day to bury bad news.

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Pat Strong

Jan 30, 2016 at 10:26

Peter, exactly! Well said.

Pat

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nickle

Jan 30, 2016 at 11:03

Why are people so ungrateful these days. Everything is assumed to be a right. With the baby boomer generation hitting retirement something had to be done. I'd love a gold plated pension. Try living through Equitable Life and fluctuating investment returns. You don't know what you've missed sitting in ivory towers

===============

So do a simple test.

Work out how value (today's value of money) the baby boomers have paid in and what they get back.

If they get back less than they paid in, why are you saying they are ungrateful?

Now work out what they could have received if the state hand't redistributed their cash and left a debt?

Now work out how much the state owes?

I think you will find you come to a different answer

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xcoalminer

Jan 30, 2016 at 12:36

She is correct! Millennial's will be worse off though!

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nickle

Jan 30, 2016 at 12:41

The question is why are they worse off when they are paying more and more in?

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ND

Jan 30, 2016 at 13:28

Kenneth, yes, looks good. Please do post back here when the NAO report goes public.

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Kenneth

Jan 30, 2016 at 14:45

ND

I will try and keep you informed.

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Pat Strong

Jan 30, 2016 at 14:59

Thrugelmir, because you lost out, others should? I Feel sorry for you, but afraid this seems like sour grapes, your comets aren't helpful.

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Ian Wilkinson

Mar 02, 2016 at 13:48

"Contracted out? You haven't lost out, says Altmann"

To quote the (1st March) government's announcement on public service GMPs:

"This means that those who reach State Pension Age on or after the 6th April 2016 and before the 6th December 2018 – when the State Pension Age equalises – will receive a fully indexed public service pension for their whole life."

"The government is committed to ensuring older people can live with dignity and security in retirement."

Great! - how about applying that lovely idea to those with GMP's in the private sector who, when retiring from April 2016 onward have been deprived of this benefit?

(An extension of this privilege beyond December 2018 will undoubtedly follow for the cherished public sector).

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Pat Strong

Mar 02, 2016 at 14:40

Exactly Ian.

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