MSE News: Government outlines flat-rate state pension

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
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  • SeekTruthSeekTruth Forumite
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    zagfles wrote: »
    It's likely to be what you were expecting under the old rules, it won't be less. It's possible the new rules would give you more, as they haven't announced how the contracted out deduction will work, but unlikely I'd say. So just assume you'll get what you were expecting and if you get more it's a bonus.
    Nice theory, but I don't think it is true!
    1. For those planning to defer taking their State Pension to build up a higher entitlement: under the current system the pension is increased by 1% for every 5 weeks deferred; under the new system it seems likely that this will change, the modelling presented to government assumes 1% for every 10 weeks deferred (strictly speaking this is nothing to do with the concept of Single Tier - it just happens to be coming in at the same time)
    2. For those banking on their spouse inheriting a certain amount from their State Pension entitlement: under the current system the spouse inherits half of the Additional Pension plus any increase due to deferral on the whole of the Basic plus on half of the Additional; under the new system they inherit half of the Protected Payment. (Simple example: Basic Pension £100, Additional Pension £50 deferred for 50 weeks. Protected payment = £100 + £50 - £144 = £6. Current system spouse inherits £10 (increase on basic) + £25 (half Additional) + £2.50 (increase on half additional) = £37.50 per week. New system spouse inherits half protected = £3 per week.
    3. For those with Contracted Out service pre-April 1997. Example (as simple as I can make it!). Basic Pension £100, Additional Pension £100, COD £50 (all COD relates to pre-1988). Initial payment under current system £150 per week (Basic + Additional - COD). Under new system Initial payment would also be £150 per week. After, say, 10 years with earnings inflation and price inflation both equal to, say, 3% under the current system the Basic and Additional would both have increased to £134 per week (to nearest pound), still worth the same as today, but the COD would remain the same at £50, so the total under the current system in 10 years time would be £218 (£134 + £134 - £50). Under the new system in 10 years the payment would be £202.
    they haven't announced how the contracted out deduction will work
    Assuming you mean 'Rebate Derived Amount (RDA)' rather than Contracted Out Deduction then DWP have published a Single Tier Technical Note (sorry, I'm not allowed to include links), para 42 of which describes the derivation. It is not totally clear what it means, but my interpretation is that the total RDA is calculated by performing the SERPS calculation for each year of contracting out between April 1978 and present (yes, I do mean SERPS even though it was replaced by S2P in 2002!). [It is possible that for years after April 2012 the divisor is not the length of the working life but some other number, possibly 44.]

    One day I might submit a short post.
  • edited 24 March 2013 at 3:49PM
    zagfleszagfles Forumite
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    edited 24 March 2013 at 3:49PM
    SeekTruth wrote: »
    Nice theory, but I don't think it is true!
    1. For those planning to defer taking their State Pension to build up a higher entitlement: under the current system the pension is increased by 1% for every 5 weeks deferred; under the new system it seems likely that this will change, the modelling presented to government assumes 1% for every 10 weeks deferred (strictly speaking this is nothing to do with the concept of Single Tier - it just happens to be coming in at the same time)
    2. For those banking on their spouse inheriting a certain amount from their State Pension entitlement: under the current system the spouse inherits half of the Additional Pension plus any increase due to deferral on the whole of the Basic plus on half of the Additional; under the new system they inherit half of the Protected Payment. (Simple example: Basic Pension £100, Additional Pension £50 deferred for 50 weeks. Protected payment = £100 + £50 - £144 = £6. Current system spouse inherits £10 (increase on basic) + £25 (half Additional) + £2.50 (increase on half additional) = £37.50 per week. New system spouse inherits half protected = £3 per week.
    Thanks - interesting! Guess there will be anomolies like this - didn't really take much notice of the deferral/inheritance transitional arrangements.
    For those with Contracted Out service pre-April 1997. Example (as simple as I can make it!). Basic Pension £100, Additional Pension £100, COD £50 (all COD relates to pre-1988). Initial payment under current system £150 per week (Basic + Additional - COD). Under new system Initial payment would also be £150 per week. After, say, 10 years with earnings inflation and price inflation both equal to, say, 3% under the current system the Basic and Additional would both have increased to £134 per week (to nearest pound), still worth the same as today, but the COD would remain the same at £50, so the total under the current system in 10 years time would be £218 (£134 + £134 - £50). Under the new system in 10 years the payment would be £202.
    Yes, but could this work the other way too? For instance AIUI someone with a deferred final salary pension usually gets the GMP part revalued using fixed revaluation (at least that's the case with mine and my wife's, though schemes have other options), this also results in the COD increasing at the same rate I believe. The rates are generally much higher than inflation http://www.pensionsadvisoryservice.org.uk/workplace-pension-schemes/final-salary-schemes/revaluation

    So if someone left service in a final salary pension in 1995, their GMP paid by the scheme would increase at 7% pa as would their COD. Would they carry on getting the GMP 7% pa increases, but not get the 7% pa increase in the COD after the switchover date? Effectively getting a 4% real terms increase in the GMP part (assuming 3% inflation)?
    Assuming you mean 'Rebate Derived Amount (RDA)' rather than Contracted Out Deduction then DWP have published a Single Tier Technical Note (sorry, I'm not allowed to include links), para 42 of which describes the derivation. It is not totally clear what it means, but my interpretation is that the total RDA is calculated by performing the SERPS calculation for each year of contracting out between April 1978 and present (yes, I do mean SERPS even though it was replaced by S2P in 2002!). [It is possible that for years after April 2012 the divisor is not the length of the working life but some other number, possibly 44.]
    So basically the same as the COD calculation.
    One day I might submit a short post.
    Please don't - the more info the better:)
  • SeekTruthSeekTruth Forumite
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    zagfles wrote: »
    Yes, but could this work the other way too? For instance AIUI someone with a deferred final salary pension usually gets the GMP part revalued using fixed revaluation (at least that's the case with mine and my wife's, though schemes have other options), this also results in the COD increasing at the same rate I believe.
    That is also my understanding, but that revaluation only takes place until the age at which the GMP is assumed to be taken, which I think is still 60/65 for women/men - despite changes to State Pension Age. Once you're passed 60/65 I think the pre-88 GMP/COD stays fixed and the post-88 GMP/COD increases at price inflation capped at 3%. The fact that the GMP increased much faster than inflation may have no effect on the initial pension paid by your former employer (presumably depends on pension scheme rules), assuming the final GMP is still less than pension. However, as I understand it, the pension scheme will then only pay its stated pension increases on the part that exceeds the GMP. (The pre-88 GMP part staying fixed and the post-88 GMP part rising at CPI capped at 3%.) So the fact that the GMP has increased to be a larger percentage of your pension may well be a disadvantage for those reaching State Pension Age after the introduction of Single Tier.
    So if someone left service in a final salary pension in 1995, their GMP paid by the scheme would increase at 7% pa as would their COD. Would they carry on getting the GMP 7% pa increases, but not get the 7% pa increase in the COD after the switchover date? Effectively getting a 4% real terms increase in the GMP part (assuming 3% inflation)?
    AAIU for those reaching SPA after switchover date, the COD is used in the calculation of Foundation Amount (the starting point within Single Tier) but is then basically forgotten and has no subsequent effect. The GMP presumably continues to rise at 7% (in the example you give) until age 60/65. However, the impression I have is that for most people the GMP is likely to be less than their company pension and so (depending on pension scheme rules) a high GMP is likely to be a positive disadvantage.
    So basically the same as the COD calculation.
    Yes.
    Please don't - the more info the better:)
    Thanks.
  • zagfleszagfles Forumite
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    SeekTruth wrote: »
    That is also my understanding, but that revaluation only takes place until the age at which the GMP is assumed to be taken, which I think is still 60/65 for women/men - despite changes to State Pension Age. Once you're passed 60/65 I think the pre-88 GMP/COD stays fixed and the post-88 GMP/COD increases at price inflation capped at 3%.
    Yes, that's my understanding too, except that it's up to either the scheme normal retirement date or state pension age.
    The fact that the GMP increased much faster than inflation may have no effect on the initial pension paid by your former employer (presumably depends on pension scheme rules), assuming the final GMP is still less than pension.
    Well in the case of both mine and my wife's, the GMP is increased by the fixed revaluation and the excess above the GMP is increased by RPI capped at 5%. So the GMP increasing at a faster rate doesn't reduce the excess, if that's what you meant. I've done a calculation comparing different years' statements to make sure this is the case, and it is.

    So the GMP increasing at a faster rate does mean we get more from the scheme initially, however under the current state pension rules, it also means the COD increases at the same rate as the GMP, so there isn't actually any benefit (unless the COD ends up more than the additional state pension, which wouldn't have been the case with us).

    But AIUI from the changeover in 2016, we'll get the benefit of the GMP increasing at a faster rate, without the offset of the COD increasing at the same rate, so we'll benefit initially, however once in payment we won't get the benefit of the inflation increases on the GMP at all for pre-88 GMP and above 3% on post-88, which under the old scheme we'd have got from the COD staying the same on pre-88 and going up at 3% max on post-88. Luckily we have very little pre-88 GMP. So I think we'd benefit from this.
    However, as I understand it, the pension scheme will then only pay its stated pension increases on the part that exceeds the GMP. (The pre-88 GMP part staying fixed and the post-88 GMP part rising at CPI capped at 3%.) So the fact that the GMP has increased to be a larger percentage of your pension may well be a disadvantage for those reaching State Pension Age after the introduction of Single Tier.

    AAIU for those reaching SPA after switchover date, the COD is used in the calculation of Foundation Amount (the starting point within Single Tier) but is then basically forgotten and has no subsequent effect. The GMP presumably continues to rise at 7% (in the example you give) until age 60/65. However, the impression I have is that for most people the GMP is likely to be less than their company pension and so (depending on pension scheme rules) a high GMP is likely to be a positive disadvantage.
    Looking at the link I posted above it seems the way mine and my wife's schemes work is statutory, ie the GMP and pension in excess of the GMP are increased separately, rather than the GMP being increased and that increase being absorbed into the overall increase for the total pension, which I think you were implying.
  • SeekTruthSeekTruth Forumite
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    zagfles wrote: »
    Yes, that's my understanding too, except that it's up to either the scheme normal retirement date or state pension age.

    Apologies, it seems I was wrong - not sure where I got my idea from.

    Looking at the link I posted above it seems the way mine and my wife's schemes work is statutory, ie the GMP and pension in excess of the GMP are increased separately, rather than the GMP being increased and that increase being absorbed into the overall increase for the total pension, which I think you were implying.
    Agreed, I was wrong again!
    But AIUI from the changeover in 2016, we'll get the benefit of the GMP increasing at a faster rate, without the offset of the COD increasing at the same rate, so we'll benefit initially, however once in payment we won't get the benefit of the inflation increases on the GMP at all for pre-88 GMP and above 3% on post-88, which under the old scheme we'd have got from the COD staying the same on pre-88 and going up at 3% max on post-88.
    Agreed

    Hopefully I'll learn from some of my mistakes - but no promises.
  • zagfleszagfles Forumite
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    SeekTruth wrote: »
    Apologies, it seems I was wrong - not sure where I got my idea from.


    Agreed, I was wrong again!

    Agreed

    Hopefully I'll learn from some of my mistakes - but no promises.
    Don't worry about it - you raised some good points.
  • SeekTruthSeekTruth Forumite
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    With regard to the GMP age I have now found a quote from September 2012:
    Steve Webb, Pensions Minister, has confirmed that the Guaranteed Minimum Pension (GMP) age for women has not increased in line with the State Pension age.
    Sorry but I can't post a link.

    Don't know whether anything has changed in the past 6 months or whether this necessarily has anything to do with increases of GMP during deferment. But, no wonder people get confused.
  • ThrupneybitThrupneybit Forumite
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    I'm self employed & only ever paid class 2 NI.
    My retirement date is March 2016.
    I have savings so can't be means tested.

    My question is:
    For 2weeks after retiring I'll receive the basic £107
    Will this figure rise to £144 in the April or will I be locked into £107 for ever.

    Any thoughts appreciated
  • SeekTruthSeekTruth Forumite
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    I'm self employed & only ever paid class 2 NI.
    My retirement date is March 2016.
    I have savings so can't be means tested.

    My question is:
    For 2weeks after retiring I'll receive the basic £107
    Will this figure rise to £144 in the April or will I be locked into £107 for ever.

    Any thoughts appreciated
    Sorry to be the bearer of bad news. But on current plans the new Single Tier pension will only affect those with a State Pension Age after the introduction date (April 2016)icon9.gif. On the bright side, at least the Single Tier pension scheme won't make you any worse off than you were originally expecting:)
  • ekeirekeir Forumite
    26 Posts
    As I understand it there is no advantage to anybody from being on the new flat rate pension anyway. I will qualify for it by a couple of weeks but am unlikely to any better off.
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