New state pension rules and 'contracting out'

pandora205 wrote: »

I have just had a conversation with the Future Pension Centre about my contributions towards my state pension. Currently I have 42 years so I would be entitled to £113,10 and I plan to work for another 5 years (to my SPA). ... I knew the flat rate pension was rising to £144 but I hadn't realised that my LGPS contributions (and previously TPS) would count as 'contracted out'. I've paid full superannuation plus NI contributions the whole time I've been working. This will mean a deduction (of an amount not yet known due to the changes) so it is not likely that I would be better off.

You will be better off.

The contracted out money was used to increase the payments that will be made by the work pension.

Meanwhile, what will happen with the flat rate setup is that a foundation amount will be calculated for you when it starts. That will be the higher of your entitlement under the old and new rules. In your case it will probably start or only a little above the current basic state pension level with little additional state pension because you were contracted out at all times. However, your time worked after the flat rate pension is introduced will add something in the region of £4.30 to £4.60 a week to the state pension for each year worked. That will continue until you stop working, reach the maximum flat rate level or reach state pension age.

By contrast, a person who was contracted in would have a foundation amount above the flat rate level, without the extra from contracting out in their work pension, and wouldn't be able to increase their flat rate entitlement for the extra years worked. It's fairly hard to see this because work pensions tend not to split out the part that's due to being contracted out but it's there.

Pretty much everyone who was contracted out is a winner under the flat rate system because they can continue getting more state pension for extra years worked while those who were contracted in just hit the cap sooner and get no extra benefit for it.

You will also probably be able to buy extra state pension years to get you to the maximum flat rate if you want to. In addition if deferring makes sense you could do that and the flat rate pension will increase by, if I recall correctly, 5.6% a year. That's much less attractive than the current 10.4% a year rate so it takes much more thought before recommending it.

Once your foundation amount is known it'll be possible to say more about what your final flat rate pension will end up being and what you can do to increase it.

I wonder what 35 years they use in the calculation! EG 1976 to 1983 I was contracted in. 1983 to date contracted out so I have 7 years contracted in and 31 contracted out which equals 38 years so far!

drumtochty wrote: »

It matters not which 35 of say 42 years of NI credits you have and which they use to calculate your flat rate pension as it is not flat rate..

The rules are 35 years gives at todays illustration rate £148.40 less any time you have been contracted out, it does not matter when, just 7 years contracted out at say £3 per year per week rebate derived amount.

So £148.40 less £21 so £127.40.

Lets take a worst case here

A Taxi driver is self employed for 35 years from 17 and then gets a normal employed job at age 52 for 13 years to 65 years of age and takes out a private pension and for simplicity is contracted out for those 13 years during those 13 years employment. He earns about £30k a year in those 13 years as an employee.

At 5 April 2016 his foundation amount is worked out. He retires say May 2016

The existing system pension is as follows.
Over 30 years so £113 a week but as he was self employed for 35 years no SSP or Serps. He was contracted out during his employee period so again no SSP or Serps.

He has 42 years so his flat rate is £148.40 but even he has 35 years contracted in the 13 years contracted out make a deduction of say 13 x £3 so £39. The rebate derived amount..

Flat rate amount is about £109.40 which is less than the old system so hie foundation amount is £113.

As he hits State Pension Age around a month after the Flat rate pension starts he cannot put in more years.

Yes he will be a winner here.

Thanks for taking the time to reply but must be thick as still a bit confused though!

Ok, so, DOB Feb '59, left school @ 16, various jobs until joined Civil Service @ 24 and have been contracted out since.

I plan to fully retire from CS (currently formally retired and re-employed) in March 2018 age 59 as will have maxed out pension to 45/80ths. State pension age is 66 and presume that @ age 59 in 2018 I will only qualify for basic state pension due to being contracted out for so long.

Q) Can I get anywhere near the full revised flat rate at age 66 if I continued working or paid (invented) self employed NI stamp from age 59 to age 66?

JezR wrote: »

Under the new system, effectively each full year's NI contribution is worth 1/35th of the flat rate pension, so you should be able to more or less get to the flat level with the voluntary contributions and the couple of years you would be working.

Thank you JezR. I don't plan to work again after age 59 in 2018 so as you say I would get a couple of years contracted in NI from April 16 so If I pay voluntary NI from 2018 to state OAP age I should just scrape in to the max on the new state pension.... assuming I survive of course!


I did read somewhere that you could pay lower self-employed NI contributions rather than the higher voluntary class 3, but looking at the Gov website it says lower self employed NI only qualifies for the basic state pension and not S2P so I presume I would have to pay class 3 to qualify for the extra.

drumtochty wrote: »

You are not confused, you are just not prepared to go through the workings that many people have shown on the forum.

At 2016 when your foundation amount is calculated you will have over 30 years NI contributions so your old system pension value will be £113 at todays rate plus maybe a tiny amount of graduated pensions maybe!

You Flat Rate amount will be £148.40 at todays rate less 33 years rebate derived amount so well less than £100.

Therefore the higher amount, your existing system pension will be your foundation amount.

You will be circa 57 at 2016 and your State retirement date will be you said 66.

Therefore assuming you work contribute to the NI pot for another 9 years and using todays illustration of the Flat Rate pension of £148.40 divided by the new 35 years requirement that give £4.24 extra per week for each year in the system.

So you would have £113 as at 2016 plus 9 years times £4.24 approx £38. New total at the 2014 illustration of £151. So you would possibly have a small reduction to reduce you to the max of £148.40.

These numbers of course would be inflated to the rates at that time.

Can I ask you how you have managed to keep in paid employment with the civil service this long if you cannot do a simple calc like I done using published data.

Whilst I thank you for your comments... it is much clearer to me now, is there really any need for your condescending tone?! You don't know me, nor do you know how I managed to stay in a job or whether or not I was prepared to go through the 'workings'!! Maybe you just didn't make it clear enough in your earlier post.


This forum is very good, and by and large full of knowledgeable and helpful people but as a relatively new member to this forum maybe you should consider not posting at all if you can't refrain from petty and insulting comments.