Forum Home» Pensions, Annuities & Retirement Planning

Totally confused by Contracted Out Deduction Letter

New Post Advanced Search
Important update! We have recently reviewed and updated our Forum Rules and FAQs. Please take the time to familiarise yourself with the latest version.

Totally confused by Contracted Out Deduction Letter

44 replies 23.9K views
Geoffo_MGeoffo_M Forumite
1.2K posts
Part of the Furniture Combo Breaker
✭✭✭
I'm 65 next month when I'll start claiming my state pension. I've already had a pension forecast saying I should get £107.45 a week basic basic plus £4.62 additional state pension (I've been contracted out for most of my working life).

Now I've received a letter this morning saying that my total Contracted Out Deduction figure is £131.26 a week and I think they are saying that had I not been contracted out, I would have received this amount in addition to my state pension. But that can't be right can it because I understood the maximum state pension for someone who has never joined a private scheme & has worked the 30 qualifying years was around £144. Not my £107.45 plus the £131.26 = £238.71. Very confusing, they can't mean the COD will come off my £112 can they as it is more than that?

«1345

Replies

  • LintonLinton Forumite
    13.1K posts
    Part of the Furniture 10,000 Posts Name Dropper Hung up my suit!
    ✭✭✭✭✭
    Geoffo_M wrote: »
    I'm 65 next month when I'll start claiming my state pension. I've already had a pension forecast saying I should get £107.45 a week basic basic plus £4.62 additional state pension (I've been contracted out for most of my working life).

    Now I've received a letter this morning saying that my total Contracted Out Deduction figure is £131.26 a week and I think they are saying that had I not been contracted out, I would have received this amount in addition to my state pension. But that can't be right can it because I understood the maximum state pension for someone who has never joined a private scheme & has worked the 30 qualifying years was around £144. Not my £107.45 plus the £131.26 = £238.71. Very confusing, they can't mean the COD will come off my £112 can they as it is more than that?


    State pension + S2P/SERPS can be a lot more than £144. So I think your original understanding is correct. I believe the £144 comes from what someone who was only eligible for the basic £107 would actually get: they would be entitled to Pension Credit which would raise their income to around £144.
  • edited 4 April 2013 at 2:15PM
    xylophonexylophone Forumite
    36.2K posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    edited 4 April 2013 at 2:15PM
    I'm 65 next month when I'll start claiming my state pension. I've already had a pension forecast saying I should get £107.45 a week basic basic plus £4.62 additional state pension (I've been contracted out for most of my working life).

    http://www.pensionschampions.co.uk/?q=node/13

    http://forums.moneysavingexpert.com/showthread.php?p=60319901#post60319901

    post 18.
  • Geoffo_MGeoffo_M Forumite
    1.2K posts
    Part of the Furniture Combo Breaker
    ✭✭✭
    xylophone wrote: »
    I'm 65 next month when I'll start claiming my state pension. I've already had a pension forecast saying I should get £107.45 a week basic basic plus £4.62 additional state pension (I've been contracted out for most of my working life).

    http://www.pensionschampions.co.uk/?q=node/13

    http://forums.moneysavingexpert.com/showthread.php?p=60319901#post60319901

    post 18.

    Thanks, I wish I had just one detailed letter like the example in your post 18, at least that's clear if a little lengthy. I can't understand how mine can be as high as £131 a week I've had deducted, surely if I'd stayed in the state scheme & never joined my company's scheme I would never now be entitled to a state pension of £238 would I?

  • JohnB47JohnB47 Forumite
    1.8K posts
    Tenth Anniversary 1,000 Posts Name Dropper
    ✭✭✭
    Geoffo_M wrote: »
    Thanks, I wish I had just one detailed letter like the example in your post 18, at least that's clear if a little lengthy. I can't understand how mine can be as high as £131 a week I've had deducted, surely if I'd stayed in the state scheme & never joined my company's scheme I would never now be entitled to a state pension of £238 would I?

    I'm confused too as to why your COD figure is so high. 'SeekTruth' on that thread that xylophone quoted, said that the Additional State Pension and COD amounts should be roughly the same.

    Also, the COD is a deduction to the Additional State Pension, not the Basic State Pension, so I would assume that it simply wipes out the £4.62 figure and leaves you with £107.45 (or whatever it is now that its been uprated by £2.5%).

    Can anyone confirm these assumptions?
  • Geoffo_MGeoffo_M Forumite
    1.2K posts
    Part of the Furniture Combo Breaker
    ✭✭✭
    JohnB47 wrote: »
    I'm confused too as to why your COD figure is so high. 'SeekTruth' on that thread that xylophone quoted, said that the Additional State Pension and COD amounts should be roughly the same.

    Also, the COD is a deduction to the Additional State Pension, not the Basic State Pension, so I would assume that it simply wipes out the £4.62 figure and leaves you with £107.45 (or whatever it is now that its been uprated by £2.5%).

    Can anyone confirm these assumptions?

    Well I was expecting a tiny bit of Additional State Pension for the first 3 years of my working life when I wasn't eligible to join the company scheme. Right at the end of my COD letter it says "Total COD £131.26 This is the same amount as that shown on your Award Notice & Statement of Details issued by the Dept of Work & Pensions". Now I haven't received that yet, though I applied for my pension about a month ago, I'm wondering now if when I get that, it will be the same as the statement mentioned in post 18 of xylophone's link? Could that be it? Still can't understand why it's £131, seems much too high to me?

  • Important update! We have recently reviewed and updated our Forum Rules and FAQs. Please take the time to familiarise yourself with the latest version.
  • SeekTruthSeekTruth Forumite
    207 posts
    ✭✭
    JohnB47 wrote: »
    I'm confused too as to why your COD figure is so high. 'SeekTruth' on that thread that xylophone quoted, said that the Additional State Pension and COD amounts should be roughly the same.

    Also, the COD is a deduction to the Additional State Pension, not the Basic State Pension, so I would assume that it simply wipes out the £4.62 figure and leaves you with £107.45 (or whatever it is now that its been uprated by £2.5%).

    Can anyone confirm these assumptions?
    Just goes to show how complicated the subject can get.

    Yes, on the thread quoted I did say the ASP1 and the COD amounts should be roughly the same. But that was for one particular person who had given some details of their contribution history. And note, ASP1 refers to SERPS earned between April 1978 and April 1997, not to the whole Additional State Pension.

    The case quoted on this thread seems to be different. The amount of COD quoted of £131.26 does seem high. All I can assume is that Geoffo M left his contracted out pension scheme at some point, so his benefit was deferred. During the deferred period the pension scheme can select one of 2 or 3 permissible revaluation methods for the Guaranteed Minimum Pension (GMP). I'm guessing Geoffo M's scheme selected fixed rate revaluation, whereas the scheme referred to on the other thread was LGPS, which selects Average Earnings revaluation. This is important because the COD is equal to the GMP and is revalued in the same way. So, during the deferred period the GMP (and hence COD) are increasing at a fixed rate that could well have been higher than the average earnings increases that ASP1 was revalued by over the same period.

    The end result of these revaluations seems likely to be that COD is considerably higher than ASP1.

    Using the terminology introduced by xylophone in the other thread, Geoffo M should receive as state pension the sum of the following:
    1. Basic State Pension: £107.45 in 2012/13, £110.15(?) for 2013/14
    2. ASP1 minus COD (if this is negative, as seems likely in Geoffo M's case, then it is treated as zero)
    3. ASP2 (SERPS from April 1997 to April 2002)
    4. ASP3 (S2P from April 2002 to present)
    5. GRB (Graduated Retirement Benefit from 1961 to 1975)
    In addition the pensions scheme(s) through which he was contracted out between 1978 and 1997 will pay him (as part and parcel of his pension from it/them) his GMP (totalling about £131.26 per week).
  • edited 4 April 2013 at 9:07PM
    JohnB47JohnB47 Forumite
    1.8K posts
    Tenth Anniversary 1,000 Posts Name Dropper
    ✭✭✭
    edited 4 April 2013 at 9:07PM
    Thanks for that. Sorry to have confused things.

    Also, sorry if I'm butting in here Geoffo M but could I just clarify one thing and then I'll butt out?

    SeekTruth - we're going from thinking that Geoffo is being told he has a deduction of £131.26 heading his way, to it being an actual payment of £131.26 he'll be getting? Right?

    How can that be?

    Thanks again.
  • SeekTruthSeekTruth Forumite
    207 posts
    ✭✭
    JohnB47 wrote: »
    Thanks for that. Sorry to have confused things.

    Also, sorry if I'm butting here Geoffo M but could I just clarify one thing and then I'll butt out?

    SeekTruth - we're going from thinking that Geoffo is being told he has a deduction of £131.26 heading his way, to it being an actual payment of £131.26 he'll be getting? Right?

    How can that be?

    Thanks again.
    In order for a pension scheme to contract people out of the Additional State Pension (between 1978 and 1997) it had to ensure it provided a pension as least as good as the ASP, this was termed the Guaranteed Minimum Pension (GMP). So the contracted out scheme has to pay Geoffo M at least the GMP (£131.26).

    Because of the neat(!) way the state took on responsibility for some/all of the inflation increases of the GMP once in payment, ASP1 still includes SERPS, even though the employee was contracted out. But, so that they did not get the money twice, once from their employer (via GMP) and once from the state (via ASP1) the COD is deducted from ASP1. In Geoffo M's case the COD is £131.26, from a rough calculation I think the most that ASP1 could possibly be is about £100. So ASP1 minus COD is a negative number (£31 or worse), however for calculating the state pension a negative result here is treated as zero.

    In other words the COD of £131.26 is both a payment and a deduction. It is part and parcel of the payment from the contracted out scheme and it is a deduction in the calculation of the state pension.
  • JohnB47JohnB47 Forumite
    1.8K posts
    Tenth Anniversary 1,000 Posts Name Dropper
    ✭✭✭
    OK. Thanks.

    I get it now.
  • edited 5 April 2013 at 4:09PM
    Geoffo_MGeoffo_M Forumite
    1.2K posts
    Part of the Furniture Combo Breaker
    ✭✭✭
    edited 5 April 2013 at 4:09PM
    SeekTruth wrote: »
    Just goes to show how complicated the subject can get.

    Yes, on the thread quoted I did say the ASP1 and the COD amounts should be roughly the same. But that was for one particular person who had given some details of their contribution history. And note, ASP1 refers to SERPS earned between April 1978 and April 1997, not to the whole Additional State Pension.

    The case quoted on this thread seems to be different. The amount of COD quoted of £131.26 does seem high. All I can assume is that Geoffo M left his contracted out pension scheme at some point, so his benefit was deferred. During the deferred period the pension scheme can select one of 2 or 3 permissible revaluation methods for the Guaranteed Minimum Pension (GMP). I'm guessing Geoffo M's scheme selected fixed rate revaluation, whereas the scheme referred to on the other thread was LGPS, which selects Average Earnings revaluation. This is important because the COD is equal to the GMP and is revalued in the same way. So, during the deferred period the GMP (and hence COD) are increasing at a fixed rate that could well have been higher than the average earnings increases that ASP1 was revalued by over the same period.

    The end result of these revaluations seems likely to be that COD is considerably higher than ASP1.

    Using the terminology introduced by xylophone in the other thread, Geoffo M should receive as state pension the sum of the following:
    1. Basic State Pension: £107.45 in 2012/13, £110.15(?) for 2013/14
    2. ASP1 minus COD (if this is negative, as seems likely in Geoffo M's case, then it is treated as zero)
    3. ASP2 (SERPS from April 1997 to April 2002)
    4. ASP3 (S2P from April 2002 to present)
    5. GRB (Graduated Retirement Benefit from 1961 to 1975)
    In addition the pensions scheme(s) through which he was contracted out between 1978 and 1997 will pay him (as part and parcel of his pension from it/them) his GMP (totalling about £131.26 per week).

    Thank you so much, your understanding of this is far greater than mine will ever be. Don't know if this helps you to understand my circumstances but £94 of that £131 comes from a section 32 buy-out plan I bought in Nov 1987 (would you believe just £10k then is going to buy me an annual pension of just over £9k now, I'm amazed & very pleased with that). The other £37 comes from being in my last employer's scheme from 1987 to 2008. Just to clarify though, will I still get my £112 state pension do you think - I'm concerned they might be going to try and take the £131 figure off the £112 to leave me with nothing in state pension? Again, a massive thanks to SeekTruth & JohnB here who understands far more than I ever will - just wish I could join you more in your understanding.

This discussion has been closed.

Quick links

Essential Money | Who & Where are you? | Work & Benefits | Household and travel | Shopping & Freebies | About MSE | The MoneySavers Arms | Covid-19 & Coronavirus Support