An amazing piece of official bungling has left thousands of people worse off - and the steps that are now being taken to correct previous errors could backfire unless care is taken with the advice a person receives.

One of the cornerstones of the social security system is a person’s national insurance contribution record. The Contributions Agency used to run an annual scan at the end of each tax year to identify people who had not paid, or been credited with, enough contributions to make that tax year count towards their basic state pension.

These people then received a deficiency notice (DN) inviting them to pay voluntary class 3 contributions to protect their pension rights. Unbelievably, as part of an economy drive, the annual DN exercise was scrapped after the 1995-6 tax year.

This meant that hundreds of thousands of people have retired in the last nine years on a lower pension than they could otherwise have got, as they hadn’t been given the chance to make-up their contributions.

The annual DN exercise restarted in October 2004 for the tax year 2002-3. The Inland Revenue will also undertake a one-off scan to cover all tax years from 1996-7 to 2001-2.

Because DNs had not been sent out, the Inland Revenue has extended the normal six-year time limit for paying class 3 contributions. The final date is 5 April 2009 if the DN letter is issued after 5 April 2004, and 5 April 2010 if the DN letter is issued after 5 April 2005.

More than 500,000 pensioners will be contacted by the Inland Revenue and the Department for Work and Pensions (DWP). Many who are contacted will be people who are known to social work and advice agencies. They will be asked to decide if they want to make up their incomplete NI record. They will have to balance up the following factors:

• What is the cost of making up the record?
• How much extra weekly pension will that generate?
• How much arrears will be paid? A person who makes up their NI record with class 3 voluntary contributions might be entitled to an extra £5 a week going back to 1998 - more than £1,500.
• Can the person afford the initial outlay in order to receive a higher pension?
• What will be the effect on pension credit and other means-tested benefits if the retirement pension is increased? It seems that some of the arrears of retirement pension will be withheld to make up for the "extra" pension credit or income support received because of the lower pension. And current pension credit awards will probably be reduced.
• What will be the effect on housing and council tax benefit - which may go down by £8.50 for every £10 extra retirement pension received for people not on guarantee credit? One piece of good news is that the DWP has advised councils not to retrospectively recalculate housing benefit for the years that arrears are paid nor take the arrears into account as capital.

There will be a dedicated helpline for people to call with their queries and the DWP has promised to help people calculate if it is worthwhile making up their NI record.

Gary Vaux is head of money advice, Hertfordshire Council. He is unable to answer queries by post or telephone. If you have a question to be answered please write to him c/o Community Care