Pensioners face potential financial shortfall due to 1978 rule

A warning has been issued for state pensioners after the Department for Work and Pensions (DWP) ended government payments for living cost increases on your Guaranteed Minimum Pension (GMP). The GMP is a minimum pension that a workplace pension scheme usually provides. It only applies to people who were contracted out of the Additional State Pension from 6 April 1978 to 5 April 1997.

The GMP you receive from a workplace pension scheme is typically the same, or more than, the Additional State Pension you would have received if you had not been contracted out. However, the DWP warns: "Each year pension schemes have to increase the amount of GMP built up from April 1988 to April 1997 in line with living costs, this is capped at 3%. This is called 'indexation'.

"Pension schemes did not have to provide indexation to GMPs built up between April 1978 and April 1988. To stop people with GMPs losing out they could be paid increases to cover living costs through the Additional State Pension. It only applied to people reaching State Pension age before 6 April 2016

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"The new State Pension started on 6 April 2016. If you reach your State Pension age on or after this date you will get the new State Pension. You will not get the Additional State Pension from the government which would have included your indexation. These increases ended when the new State Pension started."

The DWP provides an example of how this might adversely impact you, reports Birmingham Live.

One scenario is if you received a weekly GMP of £35 in 2015 and inflation stood at 2%, then the following year your Additional State Pension would rise by a maximum of just 70 pence per week. A second example is if you reach State Pension age on or after 6 April 2016 you do not receive Additional State Pension or these increases.

It states: "The weekly loss is small for the first year but can build up over time. Somebody with a large GMP reaching State Pension age from April 2016 to March 2017 could have a notable loss over their whole retirement."