The Cosmic Watchdog

Up to 10 million UK savers may be as much as £20,000 worse off because part of their state pension was not linked to inflation.

The issue affects those who chose to contract out of the state pension and they may find some of their pension has not kept up with inflation.

People who contracted out of the state pension to join their employer’s defined benefit scheme between April 6, 1978, and April 5, 1997 have been warned they may face an inflation timebomb.

When they chose to contract out their National Insurance payments were not paid into the state earnings related pension scheme, or Serps.

Contracting out of Serps means that instead of paying it to HMRC, your employer paid part of your National Insurance (NI) contribution into your private pension instead of the State Pension. This meant the saver and the employer paid lower NI contributions.

But the state pension element of their pension, known as guaranteed minimum pension (GMP) was not indexed with a cap at 3%. This is what is known as post-1988 GMP.

The issue is only believed to affect those in private final salary – defined benefit – schemes as those in public sector schemes had the GMP part of their pension inflation-linked.

Anyone who retired on and after April 6, 2016, could be affected by the change.

A campaigner who did not want to be named said savers in private final salary schemes were the worst hit. He said those in public sector final schemes had the GMP part of their pension inflation linked so they didn’t miss out on any inflation rises.

A DWP spokesperson said anyone who is concerned needs to read the online factsheet on the changes – the Guaranteed Minimum Pension (GMP) and the effect of the new State Pension – GOV.UK – and contact the department if they think they have been affected.

The spokesman added: “These changes only affect people who reached state pension age from April 6, 2016, who can benefit from the transitional rules of the new State Pension.”

How to find out if you were contracted out of Serps:

You can check if you were contracted out of SERPS by:

• Checking any payslips from before April 2016
• Contact your pension provider
• You can also chekc your state pension forecast
• Any documentation from providers for references to contracted out rights or protected rights