Questions on "Additional State Pension"

brianq

Hi All,

A few newbie questions on "Additional State Pension".

I had a company pension (Scottish Widow was the provider) in my last job but no longer have one with the current employer.

Did I opt out of "Additional State Pension" while I had the company pension? How do I know whether I'm still opted out or not?

Generally speaking do you always have to opt out of "Additional State Pension" when taking a company pension scheme, or a personal pension like SIPP?

How is the value of "Additional State Pension" calculated? Since it's provided by the state it should be risk free compared to personal pensions, is it? For people not good at managing their own finances, could it actually be preferable to having a personal pension?

Sorry if any of what I said didn't make much sense.

Thanks for the help!

hugheskevi

Did I opt out of "Additional State Pension" while I had the company pension?

You might have done - you could have been a contracted-in or a contracted-out member. You will have to check your personal arrangements.

How do I know whether I'm still opted out or not?

Contracting-out ended in 2012 for Defined Contribution arrangements (the name of what you had), so you will now be contracted-in.

Generally speaking do you always have to opt out of "Additional State Pension" when taking a company pension scheme, or a personal pension like SIPP?

No, and you cannot do this now (the correct term is contracted-out, rather than opt-out which means something else).

How is the value of "Additional State Pension" calculated?

You accrue an amount of Additional State Pension each year, with the amount you accrue linked to your earnings, the calculation is quite complicated. Until retirement, the amount accrued increases by earnings, and new accruals each year are added to it.

Since it's provided by the state it should be risk free compared to personal pensions, is it?

It doesn't have investment risk, but it comes with other risks - notably policy change risk, especially around the age at which you will receive it and the indexation that is applied to it once in payment.

For people not good at managing their own finances, could it actually be preferable to having a personal pension?

Academic since you can no longer contract-out.

jamesd

So far as I know Scottish Widows only provides personal pensions and those are not normally contracted out of S2P (formerly SERPs, pays for additional state pension benefits). If you chose to contract out then you would have received rebates from HMRC once a year. if you did not receive them, you had not contracted out.

You cannot be contracted out into a personal pension any more, that option was withdrawn from April 2012. Money from past years of contracting out remains in the pension and continues to be yours to manage to take a pension at any age from 55 upwards.

It's not true that the additional state pension system is lower risk than a personal pension. The risks are different. No investment risk, but the governments of the day get to decide when you can take the money and how much you'll get. We may see a fine example of the rules changing underfoot early in 2013 when the government introduces proposals for some form of flat rate state pension.

Yes, the additional state pension system is better for those who are not good at or not interested in managing investments in a personal pension.

To roughly work out the accrual rate for additional state pension under S2P do this:

1. For income up to £14,700 add £1.70 of additional pension for up to 44 years. This is incorrect for incomes below £14,700, I'm assuming at least that much.
2. For income above £14,700, subtract £14,700 from the total income up to the upper accrual point (which is £40,040) and multiply the remainder by 0.1 then divide by 44. The result is the extra annual additional state pension accrued that year, divide by 52 to get weekly. Do this for up to 44 years. The maximum accrual from this is around £1.10 per week.
3. Add the two numbers to get the final additional state pension that'll be payable. Using S2P for 44 years at the highest rates would get someone to a total of 44*£1.70 + 44*£1.10 = £123.20.
4. Add the basic state pension to get to £230.65 a week of state pensions, £11,993.80 a year.

There's a worked example from Scottish Life. They use 49 years instead of 44 for the working life. They are probably right but I'm going by my own notes from discussion with the state pension people and those might differ due to my specific circumstances or just might not have allowed for higher state pension ages.

SERPS was more generous to higher earners and less generous to lower; S2P switched to a subsidy from non-low earners to low earners.

Expect that there will be massive changes as the result of the proposals to introduce a flat rate state pension. It'll presumably completely eliminate the second step and have just flat rate accrual at a higher level for no more than 30 years. Or something else, since that's just guesswork about how they will get to a flat rate.

brianq

jamesd wrote: »

If you chose to contract out then you would have received rebates from HMRC once a year. if you did not receive them, you had not contracted out.

I don't think I have ever received anything like that during the three years with my last employer.

I was worried that I might have been contracted out in my last job without really understanding the implications and remained so even after leaving.

Thanks for the clarifications!

dunstonh

So far as I know Scottish Widows only provides personal pensions and those are not normally contracted out of S2P (formerly SERPs, pays for additional state pension benefits).

I have never come across a company pension where SW were the insurer used but they did offer group personal pensions and they are quite common. I am going to guess the op means group personal pension rather than company pension.

Scottish Widows make it easy to tell. They still indicate protected rights payments on their statements. I have a copy statement here that arrived yesterday helpfully and it refers to them as "Government payments. They still split the transfer value by showing it as the amount that is "from government payments", "from other payments" and the "total".

So, if brianqs last statement doesnt mention Government payments or protected rights then it was not contracted out.

Generally speaking do you always have to opt out of "Additional State Pension" when taking a company pension scheme, or a personal pension like SIPP?

With company pension schemes, you have COMP/CIMPs (Contracted OUT/IN) and defined benefit schemes (where most are contracted out). I dont think you have a company scheme but a group scheme. SIPPs were rarely contracted out because you couldnt use them originally for that and there was only a tiny window where you could. S226 RACs couldnt contact out. Personal pensions and stakeholder pensions (group or individual) was largely your own choice.

brianq

dunstonh wrote: »

I have never come across a company pension where SW were the insurer used but they did offer group personal pensions and they are quite common. I am going to guess the op means group personal pension rather than company pension.

Scottish Widows make it easy to tell. They still indicate protected rights payments on their statements. I have a copy statement here that arrived yesterday helpfully and it refers to them as "Government payments. They still split the transfer value by showing it as the amount that is "from government payments", "from other payments" and the "total".

So, if brianqs last statement doesnt mention Government payments or protected rights then it was not contracted out.



With company pension schemes, you have COMP/CIMPs (Contracted OUT/IN) and defined benefit schemes (where most are contracted out). I dont think you have a company scheme but a group scheme. SIPPs were rarely contracted out because you couldnt use them originally for that and there was only a tiny window where you could. S226 RACs couldnt contact out. Personal pensions and stakeholder pensions (group or individual) was largely your own choice.

Just checked the statement from October. It says "Your Yearly Sottish Widows Personal Pension Plan Statement." (I'm not sure if the nature of the pension changed after I quit the job where I joined the scheme.)

I'd need to find previous documents to figure out exactly what the policy is. But from the name of it, I suppose it is a personal pension instead of stakeholder one? Since contracting-out is no longer available as I understand now, my next question is, should I just start paying into this scheme again, or get something else.

The transferable value is actually £6 pounds less than it was a year before. I remember I picked the (investment) option of the lowest risk (deposit?) so wonder if this is down to management charge, since I haven't paid into it for over a year and half.

jem16

brianq wrote: »

should I just start paying into this scheme again, or get something else.

That all depends on the charges and the investment funds available to you.

The transferable value is actually £6 pounds less than it was a year before. I remember I picked the (investment) option of the lowest risk (deposit?) so wonder if this is down to management charge, since I haven't paid into it for over a year and half.

It could be a number of things but without knowing the actual name of the fund used, no-one can tell.

mark55man

jamesd wrote: »

There's a worked example from Scottish Life. They use 49 years instead of 44 for the working life.

James thanks for that link - it explains why (up until now) I had always been totally confused about what S2P expectations I should have for my working career (mainly contracted-out but not totally)

Now I am merely slightly bemused, which is a significant improvement, and - for my OH who has been working / child raising her whole career I think we are in abetter shape,

If I could thank you more than once I would for that post

brianq

dunstonh wrote: »

I have never come across a company pension where SW were the insurer used but they did offer group personal pensions and they are quite common. I am going to guess the op means group personal pension rather than company pension.

Yes you are right. Just checked the statements from before I quit the job. It says "Group Personal Pension Plan". This changed to "Personal Pension Plan" after I changed job.

So there was never contracting out then.