MSE News: Budget 2012: Single state pension plan confirmed

SnowMan

gadgetmind wrote: »

My understand is that *everyone* was able to contract out before this April. If they didn't, is that unfairness or people making their own decisions?

Let's say that there was a 50/50 chance of contracting-out paying off.

One person (twin 1) chose to contract-in and his twin brother (twin 2) who earned the same salary chose to contract-out.

Now contracted-out twin 2 may have won the coin toss and done better than contracted-in twin 1 and his contracted-out benefits might be worth say £10,000 more than twin 1. That's fair enough.

However to arbitrarily then give an additional £70,000 to contracted-out twin 2 and nothing to contrcated-in twin 1 is the bit that is unfair.

gadgetmind

zagfles wrote: »

Now under the new rules, the person contracted out has the opportunity, after 2017, to earn back the state pension they forsook as a result of contracting out

Unless they already have S2P to get beyond it, they can only get to £144.

OTOH I understand that many people who remained contracted in have S2P that takes them way beyond this up close to £200 pw and maybe beyond. If they are risk averse types (and I guess many who remained contrected in were and are) then this probably suits them much better than having a private pension pot.

Every few years, as markets bob up and down and HMG change state pension rules, people seem to flip flop between saying that those who opted out were victims of misselling, or that those told to opt back in were.

gterr

OK, I think I have to give up. I'm usually quite sharp when it comes to understanding financial things but this has got me completely beaten.....

On Friday I heard that I might get a bigger pension that I expected - around £144. Then on Monday I heard I might _not_ because the qualifying years requirement was going up from 30 to 35.
Then yesterday I calculated I might be able to make the 35 years after all, if I was able to keep in self-employment another years or two.... and then today I found that this pension might go down again because of deductions for periods I was contracted out....

Please excuse my stupidity as I have one last try....

Is this figure of £144 the basic pension, that will be what I would get if I have 35 years and qualify for my state pension after 2017 (or whenever the new scheme comes in), or could the sum be lower than £144 if I have 35 years but have had some years when contracted out?

Or would it just be any _additional_ sum, above and beyond the £144 that might be reduced as a result of periods contracted out?

Is there any point in trying to accrue more than 35 qualifying years?

Thanks for your time.

AnneD

Hi to everybody.

It is great everyone is taking a look at all this, as we are all trying towork out what it all means. I did a study of mine and I THINK this is what isgoing on. It may help people see what my calculations look like.

I was contracted out for quite a while. I left the company plan in 2003. Ihave 30 years qualifying years of NHI. I retire after the 2017 new rules comein. I am mid 50's. Assume I will not work before 2017.

The important thing to highlight again is that we will get our pension underthe old rules if it is better.

So step 1: we need to see what old rules will give:

Under the old rules I have a state pension forecast for the date I willretire in 2022 which is made up of:

Basic pension 107 pounds + additional pension 51 pounds minus contracted outdeduction of 48 pounds (that minus amount of 48 is taken off because itwill be the bit paid by the company plan instead because, we paid less NHI as contractedout).

So under the old scheme I get 110 pounds per week.

(Now the pension forecast I actually receives says I have a net of plus 3pounds and I have tried to work out just how on earth did they get this? Ibacked into the contracted out deduction by taking 1076 per year which is theGMP (guaranteed minimum pension) at the date I left the plan and which isdetailed clearly in my documents on leaving the company plan.My plan documents also say that because of the date I left the plan, this GMPwill compound at (approx) 4.5% per year over 19 years between2003 when I left plan and 2022 when I retire which roughly gives 1076compounding to 2496 pounds / 52 = the 48 pounds per week above that the companywill pay and therefore is deducted off our state numbers above.)

Step 2 Now we need to look at the new scheme as of April 6 2017 and seewhether it is better. As everyone is saying, the great unknown here is how theywill work out the contracted out deduction....but I HAVE noticed in the whitepaper that they say they will take it as calculated at the date April 5, 2017.(Thus NOT the date we retire like we did in the old system).

So I am going to take it that in my case the compounding effect in the newsystem is only for 14 years which is very roughly 1076 compounding upto 2003pounds at date April 2017 = 39 per week contracted out deduction instead.

So it looks like my new pension under new method per week will be

30/35 x 144 minus the contracted out deduction of 39

Gives 84 pounds a week under new system.

As this is much worse than the old system if I am correct, I would keep theold system amount of 110 pounds per week.

Furthermore it is no good me making any more voluntary contributions foryears up to April 2017 because that would only give me 144 - 39 =105 which isstill worse than the old system.

Conclusions.

1) We all need to know exactly how the contracted out deduction will be doneunder the new scheme so we can do the comparison properly between old and newsystems. Obviously my method above is not confirmed. I don't know if theywill bring in a calculation that is totally unrelated to what has gone onbefore or whether if, like I have done, it will be the same but just cut off atthe earlier date.

2) Once we have that calc, then we can do the comparison and see if weshould make any more pre 2017 voluntary contributions, for example to bring usup to 35 years. In my case above the answer would be no.

3) I think the other thing people need to focus on is that the 107pounds in the old system is NOT the same equivalent number as the 144 in thenew system. 107 has already had the contracted out amount taken off in the oldsystem. People need to realise that when they look at the 144 in the newsystem, it still needs to have its contracted out deduction taken off!

4) Once this is all sorted out. We may, if they allow it, be able to makeextra voluntary contributions post 2017, but they would only give us 4 poundsextra a week for each year of contributions (1/35 X 144). So if they allow thatI could potentially increase my 110 pounds a week if I thought it worth it (maxcan only ever be 144 pounds though).

In advance I apologise that this is rather long. Also I apologise if someonefinds a flaw in this reasoning of mine or the maths. I am also trying to seewhat it all means and may have missed something crucial!

Good luck to all.

gadgetmind

SnowMan wrote: »

Let's say that there was a 50/50 chance of contracting-out paying off.

You can if you like, but the truth is that you could pick and mix. I did.

One person (twin 1) chose to contract-in and his twin brother (twin 2) who earned the same salary chose to contract-out.

I'm not sure why either of them would make that binary choice.

However to arbitrarily then give an additional £70,000 to contracted-out twin 2 and nothing to contrcated-in twin 1 is the bit that is unfair.

Those remaining contracted in may well have built up very fat state pensions without taking on any market risk.

But it was *never* a coin toss, as both twins had access to the same information, the same choices available, and also the ability to choose when and how to use contracted in/out at various points in their lives.

It was widely discussed over the decades that the best approach was to contract out early on and then contract back in. Yes, it could have gone wrong, but the argument had merit and it meant that you got two bites at the cherry.

AnneD

Sorry for the missed spaces. I did it first in Word. Then cut and pasted into MSE. Now some spaces are missing!

SnowMan

Sorry I give up gadgetmind.

With respect you clearly do not understand the issue.

gadgetmind

gterr wrote: »

Please excuse my stupidity as I have one last try....

The White Paper is 108 pages of rather dense material. Not being able to take it all in at once is understandable, but it might help for you to print it out and highlight the parts that relate to you. TBH, even the shorted Executive Summary might cover your position.

Is this figure of £144 the basic pension, that will be what I would get if I have 35 years and qualify for my state pension after 2017 (or whenever the new scheme comes in), or could the sum be lower than £144 if I have 35 years but have had some years when contracted out?

The sum could well be lower than £144 if you were contracted out for significant periods but this calculation has not yet been made public.

Getting a state pension forecast now (it's free!) and working out when you were contracted out will help get a handle on things.

Is there any point in trying to accrue more than 35 qualifying years?

In some circumstances, yes. If once the foundation calculation is done you come out with less than £144, then you can keep adding more years.

Get the state pension statement and you'll have a better idea of how to proceed.

SnowMan

AnneD your analysis is good.

I haven't looked at every detail of your calculation but broadly speaking that is spot on.

gadgetmind

SnowMan wrote: »

With respect you clearly do not understand the issue.

I understand it, and I'm sure you understand it, but we disagree how fair the mechanics of it are. Such is life.

But please try and move beyond the black and white view of things and understand that many (most?) went for a blend of contracted out and S2P, and even if they didn't, doing so was a choice that was available to them.