How pension clawback works
In 1948 the State Pension was introduced, as well as State Pension Integration - or pension clawback. The practice allows employers to ‘claw back’ some of the pension contributions when the employee reaches State Pension age.
To offset the cost of National Insurance for companies, employers could use pension clawback to reduce the pension the employee would receive. Some companies have, and continue to use, pension clawback as a tactic to reduce costs.
All pension plans come with charges, often taken as a small percentage of the overall pot as it continues to grow. Pension clawback is a fixed cash amount.
- Pension clawback example: if you received £50,000 a year from your workplace pension scheme, then a fixed pension clawback of £2,500 a year would equal a 5% deduction every year. However, if you received £10,000 a year from your workplace pension scheme, then that same fixed £2,500 clawback would equal a 25% cut to your annual pension income.
This means that even if you’re paying into your company pension and State Pension, once you reach State Pension age you may have a clawback penalty reduce your retirement savings. Although pension clawback is a legal practice, there are growing complaints that it is unethical.
Pension clawback and discrimination
Many defined benefit workplace schemes have either capped or withdrawn pension clawback. But pensions with a clawback clause aren’t uncommon, affecting thousands of employees each year.
The impact of pension clawback varies from person to person, as we’ll explain below.
Why is pension clawback unfair?
As pension clawback is a fixed cash amount deducted from your pension - unlike other charges which usually deduct a percentage of the pot - its impact on your pension can vary. The fixed amount is based on two factors: years of service and State Pension age.
Those with larger pensions will be less affected, whilst smaller pots can see a substantial loss. Here’s a summary of those most affected by pension clawback:
Lowest paid workers
In theory, those earning less in wages are saving less for retirement in a workplace pension scheme. That income is important for supporting you in later life.
So having a pension clawback withdrawing up to a quarter (and in rarer cases even more) of your retirement savings could put you in financial hardship.
Those most affected are the lowest income workers, often women, and those seeking to retire early.
If you plan on an early retirement, then your pension income needs to last longer. So having a sizeable cutback could change how much money you have to live on.
What can you do about pension clawback?
If you’re enrolled in a pension clawback scheme, it’s likely you aren’t even aware yet. One of the issues is poor communication, with few people affected aware of its importance.
To figure out whether this is the case you can ask your workplace pension scheme directly, or carefully look over your company handbook.
If you are impacted, the next step is to consider to what extent. You may be able to manage a 5% loss to your money or have a 25% cutback to contend with.
Considering your retirement goals, it might be beneficial to make additional contributions into a personal pension to offset the future loss from pension clawback.
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As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 12-08-2021