New State Pension and Contracted Out

[platform béalfeirsde]

I am a member of a contracted-out scheme. Will I receive £144 per week if I already have 35 qualifying years?

•If you have previously been contracted out of the additional State Pension, a deduction will be applied when we calculate your foundation amount. This reflects the fact that, whilst you were contracted out, you paid lower National Insurance contributions and your employer received a National Insurance rebate to fund your workplace pension. Therefore, you could have 35 qualifying years and not receive £144 per week.

•The deduction is broadly equivalent in value to the workplace pension the rebate funded. This is consistent with the rules of the existing pension system.

Can anybody 'translate' or explain the second part which is in bold?
Thanks in advance.

[nataddick]

Since you have over 35 years qualifying years of NI contributions you should get the basic state pension under the existing rules which is currently £113.10. Your entitlement to anything on top of this, under the current rules will depend on employment history, earnings and pension scheme history.

I would recommend that your request a statement so you can confirm your exact entitlement under the existing rules. A booklet will accompany the statement which explains how the Pension is calculated.Your entitlement under the new rules cannot be less that it currently is and in some cases people may qualify for a higher state pension than the new flat rate (£148.40 is being used by the Government at the moment). Their entitlement is protected when they transfer over to the new scheme - these people are usually higher earners that have an Additional State Pension entitlement through having not contracting out. My brother is in this category.

As Robert explained, it may be possible to 'top-up' your basic state pension entitlement, depending on your age at retirement as you will be paying full rate NI contributions from 2016 onwards. Each year from then on will qualify you for 1/35th of the new flat rate pension (estimated to be £155 by then) which will be added to your existing basic state pension entitlement.

Now the bit in bold - to understand this it is necessary to understand how contracting out of a defined benefit scheme works and here is an explanation taken from a Which document that does that :-

'How does contracting out work?

Defined benefit (DB) pension scheme members (and their employers) who are contracted out pay a lower rate of National Insurance than those who remain contracted in. This is because they are no longer accumulating state second pension. They rely on their employer's scheme to make good the shortfall as part of the guaranteed payment they will receive when they retire.'

The Government would argue that your 35 years in a company pension scheme will provide you with at least the equivalent of what you would have been entitled to had you remained contracted in. Through contracting out, pension scheme members have been paying a lower rate NI contribution (currently 10.6% instead of 12%) - it is this 1.4% reduction that they refer to as the rebate funded.

What they are saying in effect is that since you have been paying 1.4% NI less than someone in the same position that was contracted in you should not get the same pension entitlement as them.

[RobertT]

The important thing to remember is that everyone’s circumstances are going to be different. Many people will be in work for upto 50 years or even more and will probably have various jobs in that time and may have acquired different workplace pensions along the way.

Equally many people will build up different state pension entitlements aswell. Which up to now have been made up of 2 elements + a ‘special’ element for being contracted out :

1) Basic State Pension, which you build up by paying NI over your working life.
2) State Second Pension/SERPS, which is based on the actual amount of NI you pay. Higher earners would therefore build more S2P. If you are/were paying into S2P you would be ‘contracted in’.

People who are/were contracted out of S2P however would either have a personal pension which both their employer & the government paid money into, although that was stopped in 2012. Or a member of a final salary/defined benefit pension which applies to RM employees, with the NI payment being 10.6% instead of 12%
This rebate was in return for the company(RM) agreeing to provide a Guaranteed Minimum Pension(GMP) amount. RM will have also been paying a reduced employer NI rate.

However from 2016 this system is due to be replaced by the so called Flat Rate State Pension, which is probably not very well named as we have since found out ! And will replace the various existing benefits like the basic state pension, pension credit, etc. Although these changes will only apply to people who reach state pension age after 6th April 2016.

The idea is that everybody will receive a total pension income of no less than £155 or whatever it’s going to be in April 2016. However if you have contracted out benefits, that figure will be reduced accordingly due to paying the reduced NI. But as Nataddick says, if you have at least 35 qualifying years you should still get at least the level of the Basic State Pension, which is currently £113.10.
If you have non contracted out pensions such as a defined contribution scheme(either private or via an employer), that will not be affected and will be in addition to your state pension entitlement.

There’s nothing easy about pensions and the new Flat Rate scheme is no exception. It seems to me that the new scheme is aimed more at the long term rather than at people due to reach state pension age in the relatively near future. The problem is that it’s caused uncertainty and confusion amongst the people it affects first.

[RobertT]

Further in depth reading of the new state pension and how it affects contracted out workers can be found by following these links:

https://www.gov.uk/government/uploads/s ... -sheet.pdf" onclick="window.open(this.href);return false;

https://www.gov.uk/government/uploads/s ... ng-out.pdf" onclick="window.open(this.href);return false;

[platform béalfeirsde]

Any word yet on how much the new flat rate pension will be reduced for each contracted out year or when a detailed announcement will be made?

[RobertT]

Any word yet on how much the new flat rate pension will be reduced for each contracted out year or when a detailed announcement will be made?

It’s not as simple as just taking off a certain amount for each contracted out year.

Your state pension under the new rules will be based on the number of qualifying years you have, and then a deduction from the new flat rate may be made depending on how many years you were contracted out. But your ‘foundation amount’ would still be at least what you would have got under the current system.

Here’s an example:

Bob has the full 35 years but all of that was contracted out so he has no S2P/SERPS at all. All he would get would be the level of the current basic state pension, currently about £115. Plus if he is still working he would also get about £4.30 added on for each year of paying in from 2016. So if he carries on working and paying NI for another 5 years his SP would be £136.50. If he has some S2P from another job that would increase the £115 accordingly.

The best way to find out what you’re likely to get is to get a state pension forecast, it will be specific to you!
https://www.gov.uk/state-pension-statement" onclick="window.open(this.href);return false;

[RobertT]

A bit more info on how contracted out workers state pensions/S2P will be treated can be found in the following link. The figures are based on a lower amount than the current SP rate and the expected single tier rate, but the principal is the same.

As you will see, being contracted out may well affect how much 'additional state pension' you receive but the amount of 'basic state pension' you get will still effectively be based on your number of qualifying years.

And don't forget that you have been building up benefits via the RM pension while you've been contracted out, so you won't be losing out on the new state pension by as much as it initially seems.

https://www.gov.uk/government/uploads/s ... ng-out.pdf" onclick="window.open(this.href);return false;

To find out how much state pension you might actually get, the best thing to do is to get a statement:
https://www.gov.uk/state-pension-statement" onclick="window.open(this.href);return false;

[platform béalfeirsde]

So if you currently have 25 years contracted out "stamps" from time spent working in Royal Mail and 12 years non contracted out "stamps" with no guarantee of any more in the future, would they count the 12 years non contracted out from the 37 in total and then take just 23 years from the Royal Mail years to make the 35?

Thank you for the replies so far by the way.

[RobertT]

So if you currently have 25 years contracted out "stamps" from time spent working in Royal Mail and 12 years non contracted out "stamps" with no guarantee of any more in the future, would they count the 12 years non contracted out from the 37 in total and then take just 23 years from the Royal Mail years to make the 35?

Thank you for the replies so far by the way.

They will see that you have enough qualifying years(37) to get at least the level of the Basic State Pension currently about £116. However because some of those years were contracted out of the Additional State Pension also known as SERPS or S2P any amount over that £116 will be reduced accordingly. So you may well not get level of the ‘new state pension’ which is expected to be around £150. Although you will have built up pension via the RMPP instead.

More info on how the new state pension scheme will work is here: https://www.gov.uk/government/uploads/s ... ng-out.pdf" onclick="window.open(this.href);return false;

If you haven’t got yourself a State Pension Statement yet, I suggest you do so because if you are 55 or over it will give you a personalised summary of what you’ll get from state pension age under the new rules and will be more accurate than anything I can tell you on this forum.
https://www.gov.uk/state-pension-statement" onclick="window.open(this.href);return false;

[RTP]

Any word yet on how much the new flat rate pension will be reduced for each contracted out year or when a detailed announcement will be made?

It’s not as simple as just taking off a certain amount for each contracted out year.

Your state pension under the new rules will be based on the number of qualifying years you have, and then a deduction from the new flat rate may be made depending on how many years you were contracted out. But your ‘foundation amount’ would still be at least what you would have got under the current system.

Here’s an example:

Bob has the full 35 years but all of that was contracted out so he has no S2P/SERPS at all. All he would get would be the level of the current basic state pension, currently about £115. Plus if he is still working he would also get about £4.30 added on for each year of paying in from 2016. So if he carries on working and paying NI for another 5 years his SP would be £136.50. If he has some S2P from another job that would increase the £115 accordingly.

The best way to find out what you’re likely to get is to get a state pension forecast, it will be specific to you!
https://www.gov.uk/state-pension-statement" onclick="window.open(this.href);return false;

Robert, if I'm reading this right are you saying that anyone who is under 55 basically has nothing to worry about with regards to recieving the full £155 (or whatever the full amount is) by the time they reach retirement age, regardless of whether or not they were contracted in or out ?

[RobertT]

Robert, if I'm reading this right are you saying that anyone who is under 55 basically has nothing to worry about with regards to recieving the full £155 (or whatever the full amount is) by the time they reach retirement age, regardless of whether or not they were contracted in or out ?

The amount of state pension someone gets will be specific to the individual and their working history. But people who have been contracted out of the State Second Pension for long periods and still have a fair amount of their working life ahead of them after April 2016, will potentially be able to benefit from both their contracted out company pension and will be still be able to build up credits in the new state pension aswell.

The whole point of contracting out was that the sponsoring scheme, in our case the RMPP, would provide a better pension than SERPS/S2P would. Under the new rules people who have been contracted out have the opportunity to get the best of both worlds and get their works pension and the full rate of the new state pension, if time allows it.

From April 2016 contracting out will stop and workers will build up 1/35th entitlement to the new state pension for each year they pay NIC's. So someone who qualifies for the full basic pension now of about £116, can still add to that at a rate of about £4.30 per year based on a new state pension amount of around £150.

[RTP]

Robert, thank you so much for taking the time to reply to my question and making things clearer. I should hopefully have plenty of time to build up the required amount when we contract back in. Feel sorry in some respects for those who are due to retire soon, but i guess that's a penalty that the government is making them pay for being able to receive state pension at age 65 or 66. Us middle age folk are being made to wait until we're 67 and the younger generation may only be able to retire at an even older age the way pensions are going.

[RobertT]

No problem, I hope I’ve been some help.

I’ll be getting my SP at 67 aswell assuming they don’t increase the age again before I get there!
I’ve been with RM for the best part of 30 years and have been contracted out of S2P for all that time, as have most people. But have still got plenty of time on my side to earn enough credits under the new state pension to get that up to the maximum.

The younger generation are in for a tough time in my opinion, with state pension age almost certain to increase to 70 and beyond in years to come. The once common ‘gold plated’ final salary scheme is now a rarity, along with high house prices, the increase in part time work, zero hour contracts, etc. The youngsters of today will almost certainly have a long working life ahead of them.

[fly-catchers]

The younger generation are in for a tough time in my opinion, with state pension age almost certain to increase to 70 and beyond in years to come. The once common ‘gold plated’ final salary scheme is now a rarity, along with high house prices, the increase in part time work, zero hour contracts, etc. The youngsters of today will almost certainly have a long working life ahead of them.

I remember when I was at school (a long time ago) they said that in the future everyone would have loads of leisure time and short working weeks. I don't think they were thinking of zero hour contracts and PT when they said that!