Pension clawback explained as final salary may not hit expectations | Personal Finance | Finance

In casual terms, pension clawback is when your workplace pension is cut by a set amount once you reach state pension age. This mechanism allowed employers to recoup some pension contributions when the employee began receiving their state pension, back when the welfare system was first starting up.

Some companies employed this approach to offset expenses, also known as integrated pensions, state pension offsets or bridging pensions. Typically, a fixed amount is deducted depending on the scheme which could be thousands, as experts at PensionBee stated: “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.”

The rules surrounding pension clawback have evolved over time, and many private pension schemes are no longer linked to the state pension. But certain workplace schemes still have this relatively unknown provision, so it is crucial to check the fine print or contact your pension provider to see if you’re due a surprise when you turn 66.

Under certain circumstances, the clawback arrangement can actually work in your favour. For example, if you retire before reaching state pension age, some schemes may provide a higher bridging pension, increasing your retirement income until you reach state pension age, after which the amount drops when you start receiving your state pension according to This Is Money.

This could bridge a significant gap for those considering early retirement. However, the sting comes if you’re unaware of the clawback being applied to your small pension pot as it could be a severe setback.

Typically, people with sizeable pensions will feel less of an impact. Lower earners, those retiring early, and particularly women are more likely to find themselves worse off due to these controversial deductions.

PensionBee has highlighted another major problem with pension clawbacks is the lack of clear communication which results in many who are affected by the charge remaining oblivious to it.

The experts recommend: “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.”