MSE News: Government outlines flat-rate state pension

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
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  • uk1uk1 Forumite
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    joefried wrote: »
    Thanks for that. Though it's depressing.

    Joe

    Joe, their might be a silver lining. Your deferment might net you 11% for each year you wait. Under the new scheme it looks like that rate will halve. If you can defer it's good value.
  • edited 19 January 2013 at 6:19PM
    SnowManSnowMan Forumite
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    edited 19 January 2013 at 6:19PM
    joefried wrote: »
    Forgive me if this has been already answered -- I've looked through this thread and not seen an answer -- but can you delay taking your state pension in order to get the new flat rate pension?

    At the moment you can delay your pension to get an increased payment. Does this stop in April 2017?

    Joe

    As earlier stated the date you reach SPA determines whether you fall under the old or new system.

    If you are assuming that the difference of reaching SPA a day before or after 6th April 2017 is the difference between £107 or £144 you probably fail to understand the proposals.

    In many cases there will be no difference at all between reaching SPA a day before or a day after 6th April 2017 under the proposals. That is because the proposal is more complex than that and the £144 includes additional state pension.

    For someone who had just been self-employed for all their working lives it might be true that there is a cliff edge beteeen £107 and £144 for those falling just outside the new system. But in many perhaps most scenarios I suspect there will be no difference, in a few scenarios there will be a small difference and in a few scenarios such as the self-employed example there will be a large effect.
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  • edited 20 January 2013 at 3:21PM
    jamesdjamesd Forumite
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    edited 20 January 2013 at 3:21PM
    Additional state pension accrues for up to a 49 year working life. So one year of being contracted out eliminates 1/49th of the potential additional state pension (if we ignore how much was earned and would have been paid into SERPS or S2P.

    If the basic state pension was £110 before the new system then that would be 1/49 x (£144-£110) x 10 years contracted out = £6.94 deduction.

    If it goes any higher than that it starts to look more like a calculation designed for punishing people for having been contracted out. Particularly poor would be using 35ths for the reduction when accrual was in 49ths or reducing the whole pension rather than just the additional portion. Both of those would be very large retrospective increases in the cost of contracting out.

    To see what that does to the cost of having contracted out, assume that the basic state pension is £110 before contracting out and the flat rate pension welfare payment is £144.

    Expected cost: 1/49th of (£144 - £110) = £0.69 a week
    Using 35ths: 1/35th of (£144 - £110) = £0.97 a week, 141%
    Using 35ths of whole: 1/35 * (144) = £4.11 a week, 596%

    So potentially six times the cost you were told about when you contracted out. And no normal investment is going to be able to pay out six times what it was expected to pay.

    At a stroke it could say that everyone who contracted out is a big loser from the change - and 80% of people have been contracted out at some point.
  • SnowManSnowMan Forumite
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    jamesd wrote: »
    Additional state pension currently accrues for males for up to a 49 year working life. So one year of being contracted out eliminates 1/49th of the potential additional state pension (if we ignore how much was earned and would have been paid into SERPS or S2P.

    If the basic state pension was £110 before the new system then that would be 1/49 x (£144-£110) x 10 years contracted out = £6.94 deduction.

    If it goes any higher than that it starts to look more like a calculation designed for punishing people for having been contracted out. Particularly poor would be using 35ths for the reduction when accrual was in 49ths or reducing the whole pension rather than just the additional portion. Both of those would be very large retrospective increases in the cost of contracting out.

    Are you talking about the calculation of the 'rebate derived amount' and whether it is penal or not?'

    If you are then you might want to read this post.

    It appears that it is calculated to be equal to the contracted-out deduction, the same figure that appears on some pension statements and which represents the amount deducted from the additional state pension when somebody reaches SPA to reflect the state benefit foregone by contracting-out.

    If that is the case then (ignoring issues of different future revaluations on the different components in the additional pension calculation) it is a pretty fair way to do it, which I believe is what Linton is saying.

    When looking at the new scheme guarantee calculation, if you have gained through contracting-out of SERPS in the past then you keep that gain and if you have lost out through contracting-out in the past then you lose that amount.
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  • jamesdjamesd Forumite
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    Yes. I've read that post.

    It appears that the calculation used for the new system is far greater than for the current contracted out deduction - potentially six times as high if the whole pension and 35 years are used instead of the additional portion and 49 years.

    That would be an outrageously unfair retrospective increase in the amount of income you need to replace from being contracted out.

    Using the contracted out deduction as currently calculated would be fine because that's the cost that had to be replaced by contracting out.
  • gadgetmindgadgetmind Forumite
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    jamesd wrote: »
    Additional state pension accrues for up to a 49 year working life

    If was when male pension age was 65, but changed to state pension age minus 16 with a fiddle depending on which side of 1978 you were born.

    My accrual in band 2 is now done on 49ths, but band 2 is now shrinking and soon going, so it's rather moot.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • LintonLinton Forumite
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    jamesd wrote: »
    Yes. I've read that post.

    It appears that the calculation used for the new system is far greater than for the current contracted out deduction - potentially six times as high if the whole pension and 35 years are used instead of the additional portion and 49 years.

    That would be an outrageously unfair retrospective increase in the amount of income you need to replace from being contracted out.

    Using the contracted out deduction as currently calculated would be fine because that's the cost that had to be replaced by contracting out.


    Where have you seem this?

    If the deduction was excessive wouldnt you be covered by the no worse than old scheme guarantee for past contributions? And there arent going to be any new contributions.
  • edited 20 January 2013 at 4:19PM
    SnowManSnowMan Forumite
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    edited 20 January 2013 at 4:19PM
    The deduction for Matt is 61 pence per week

    as (10/35 x 144) - 35 = £6.14 for 10 years of contracting out

    and for 1 year of contracting-out £6.14 divided by 10 = 61 pence
    Expected cost: 1/49th of (£144 - £110) = £0.69 a week
    So very similar.

    Using the contracted-out deduction looks the obvious practical way to do this also.

    And we are talking about one part of a two part guarantee.
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  • edited 20 January 2013 at 6:49PM
    jamesdjamesd Forumite
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    edited 20 January 2013 at 6:49PM
    Linton wrote: »
    Where have you seem this?
    Here and here.
    Linton wrote: »
    If the deduction was excessive wouldnt you be covered by the no worse than old scheme guarantee for past contributions?
    Depends how the deduction is calculated, in particular whether the current rules calculation is really done on the current rules or not. There's an example on page 51 of the white paper which seems to give the 1/35th of the whole pension as the calculation rule under the new rules, and in that example shows the current rule calculation as being higher. This then seems to reduce the number of years needed to get to £144 total. For the 32 year old with ten years, all contracted out, a reduction from 26.5 years under the new contracted out calculation to 23.1 under the old one. Yet if they hadn't been contracted out at all and had ten years in the system, it'd take them 25 more years to get to 35 years total.

    For people who aren't close to retirement in 2017 that three year difference doesn't matter. It'd matter more to someone who would only just have time to get to £144 before the reach state pension age.

    But people who have been working under the old system and who are close to retirement are likely to have more than £144 entitlement already, so won't benefit because they can't get above £144. I assume some mixture of contracted out and not contracted out work, so the person accrued some additional state pension. It'd take about 20 contracted in years at a pay level of £14,700 under current rules to get to that £144, or 13or so nearer the higher rate income level.

    There is a description of the calculation on page 35 of the draft bill but it's very unclear.

    Anyway, having looked at the more full Matt example, I have less reservation about this - provided that old rules calculation isn't tampered with.

    The new rule calculation looks outrageous, though. I wonder who could possibly be better off with the new rule calculation than the current rule one?
  • SnowManSnowMan Forumite
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    jamesd wrote: »
    The new rule calculation looks outrageous, though. I wonder who could possibly be better off with the new rule calculation than the current rule one?

    Self-employed 35 years
    Contracted-in low earner 35 years
    Contracted-out low earner 35 years

    So can apply to someone contracted-out, contracted-in or not eligible for any additional pension
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