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Totally confused by Contracted Out Deduction Letter - Page 3

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Totally confused by Contracted Out Deduction Letter

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  • Some more questions for you!

    1. How many periods of contracted out employment did you have between 6/4/1978 and 5/4/1997?
    2. Did you leave that (any of those) employer(s)? If so, when? [I'm assuming that at some stage you left a deferred pension with a pension scheme that opted to revalue GMP by a fixed percentage - the date of leaving will tell us what percentage was used.]
    3. Do you have documentation from the date of leaving that gives the value of GMP at that date?
  • edited 23 April 2013 at 11:24PM
    xylophonexylophone
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    edited 23 April 2013 at 11:24PM
    Have you had a look at post 12?
    1978 saw the introduction of SERPS. Employers/employees paid additional NI contributions to build up a pension in addition to the basic state pension.

    However, in return for guaranteeing a pension that was at least as great as would be provided by SERPS, employers/employees could contract out of the SERPS scheme and pay lower NI contributions.

    As a sweetener to employers, the state guaranteed that when the state pension came into payment, ( and in the case of men especially this was often several years after the occupational scheme came into payment) it would pay inflation linked increases on that part of the occupational pension that represented the GMP.

    In 1988, this government wished to save money on the inflation linking guarantee and therefore the requirement became that the Occupational Scheme would have to inflation link that part of the occupational pension representing post 88 GMP up to 3%- if inflation was over 3% the government would pay the balance.

    The GMP scheme ended in 1997.

    When you drew your occupational pension, the whole of it would have increased in payment according to Scheme rules up to State Pension Age.

    However, at SPA, a calculation would have been done splitting your occupational pension into its component parts -

    pre 1988 GMP This amount remains constant.
    1988-1997 GMP
    What remained over and above - the "excess"

    At the same time, NICO would have calculated what you would have accrued in additional state pension had you not been contracted out during the years 1978-1997.

    So, in your particular case, when you drew your state pension, it was calculated that you would have had ASP of £98.82 had you not contracted out. This is notional GMP and is the pre 97 ASP shown on your statement.

    However, your particular circumstances have given you a contracted out deduction that is greater than this "notional ASP" because that part of your occupational pension that represented your GMP has been increasing in deferment at a rate greater that that used by the state. (See post 12)

    Your occupational pension provider can give you a statement showing your situation as in red paragraph above.

    In effect, you will receive no increase on the pre 97 Additional State Pension until your Contracted Out Deduction is exceeded by pre 97 ASP. See post 13.

    Hope this helps.
  • howy22howy22
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    Hi SeekTruth,
    I was only with one employer so I assume I only had one period of being contracted out.
    I left that employer in March 2001 and received my occupational pension from that date.
    The only GMP figures I have are the ones I requested recently, as below.

    Pre 88 GMP £60.65/wk
    Post 88 GMP £38.17/wk
    Total GMP £98.82/wk
  • howy22howy22
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    Thanks for the references xylophone.

    I understand the mechanism of reducing the AP by COD or GMP and the possibility of it resulting in a negative figure but I don't understand why the Pension Service uses a COD of £133.56 when the COD from HMR is £98.82 and my Total GMP is £98.82.

    Am I missing something?
  • edited 23 April 2013 at 10:06PM
    xylophonexylophone
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    edited 23 April 2013 at 10:06PM
    The ASP (GMP) of £98.82 was what you would have accrued through SERPS had you not been contracted out.

    The £132 .43 was your GMP from your pension scheme revalued to State Pension Age presumably using Fixed Rate Valuation? 6.25% per annum? This is in excess of the increase in average earnings for the period in question.
    See http://www.barnett-waddingham.co.uk/news/2012/07/what-is-a-gmp/
    And see http://www.nidirect.gov.uk/understanding-the-additional-state-pension
    How additional State Pension is increased

    Additional parts of the State Pension rise in line with the increase in prices. These include:

    the State Second Pension (S2P)
    the State Earnings-Related Pension Scheme (SERPS)
    Graduated Retirement Benefit
    Extra State Pension received for deferring or putting off (deferring) your State Pension claim (also called ‘increments’)
    Until you reach State Pension age, the State Second Pension or SERPS you have built up will usually increase with the growth in average earnings. This is also known as ‘revaluation’.
  • Howy22, I share your puzzlement regarding HMRC stating in 2012 that your COD was £132.43 and in 2013 that it was £98.82.

    I am guessing that your GMP at the time of leaving your employment (March 2001) was about £70/wk. At that time it would have equalled both your contracted out Additional Pension earned between 1978 and 1997 and also the COD. Between March 2001 and August 2012 the AP was revalued by average earnings, resulting in an increase to £98.83 [perhaps someone who understands better than I could let us know precisely which figure would be used - see http://www.legislation.gov.uk/uksi/2011/475/schedule/made or http://www.legislation.gov.uk/uksi/2012/187/schedule/made]
    Between March 2001 and August 2012 the GMP and COD would have been increased by a method selected by your pension scheme, either average earnings or fixed rate (6.25% pa). If average earnings was used then the result would be GMP and COD at August 2012 of £98.83/wk, if fixed rate was used then the result would be about £130/wk.

    Can I suggest that you ask your pension scheme which revaluation method was adopted. If the answer is average earnings then it appears DWP are using the wrong COD figure for you - and it would certainly be worth your while to get it corrected. If the answer is fixed rate then DWP are using the correct figure but HMRC have given the wrong figure this year.
  • xylophonexylophone
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    am guessing that your GMP at the time of leaving your employment (March 2001) was about £70/wk. At that time it would have equalled both your contracted out Additional Pension earned between 1978 and 1997 and also the COD. Between March 2001 and August 2012 the AP was revalued by average earnings, resulting in an increase to £98.83 [perhaps someone who understands better than I could let us know precisely which figure would be used

    S148 Orders http://www.watsonwyatt.com/europe/pubs/statistics/render2.asp?ID=14

    http://www.barnett-waddingham.co.uk/news/2012/07/revaluation-for-early-leavers/

    "Any GMP element of a preserved pension must also be revalued, but the method is different to revaluing excess benefits. Currently, trustees have the choice of two different methods of revaluing GMPs: Full Rate increases or Fixed Rate increases. Schemes which opt for increases at Full Rate increase their GMPs annually in line with Section 148 Orders (previously known as Section 21 Orders). Section 148 Orders are based on the increase in the National Average Earnings Index each year.

    Fixed Rate revaluation increases are determined by the date of termination of pensionable service. The annual percentage increase is fixed and depends on the date of leaving as follows:
    Date of Leaving
    Annual Percentage Increase
    Between 6 April 1978 and 5 April 1988
    8.50%
    Between 6 April 1988 and 5 April 1993
    7.50%
    Between 6 April 1993 and 5 April 1997
    7.00%
    Between 6 April 1997 and 5 April 2002
    6.25%
    Between 6 April 2002 and 6 April 2007
    4.50%
    Between 5 April 2007 and 5 April 2012
    4.00%
    After 6 April 2012
    4.75%

    The revaluation period for GMPs is the number of complete tax years between a member's date of leaving and their GMP Pension Age. For members retiring before they reach GMP Pension Age, the revaluation period for GMPs would normally be the number of 6 Aprils between the two dates."

    As you say, the OP needs to check with his Occupational Scheme Administrator how his GMP was revalued - his statements of benefits for 2012 and 2013 and his original letter from HMRC are consistent with the scheme's having used FiRR.
    Incidentally, did you read SnowMan's post at http://forums.moneysavingexpert.com/showthread.php?p=60651909#post60651909
  • edited 24 April 2013 at 3:39PM
    SnowManSnowMan
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    edited 24 April 2013 at 3:39PM
    Re howy22s figures:

    The national average earnings revaluation factor for ASP will have been 1.454 see here (it is the 11 year revaluation figure shown in the left hand column of 45.4% and adding 1 to give the factor, and 11 years is the number of complete tax years from leaving to age 65)

    The revaluation factor assuming the company pension scheme used fixed rate revaluation for the GMP (COD) will have been 1.948 (= 1.0625 ^ 11).

    The GMP (COD) at age 65 was 132.43 and the ASP was 98.83.

    So working back:

    ASP at date of leaving (March 2001) = 98.83/1.454 = 67.97

    GMP (COD) at date of leaving = 132.43/1.948 = 67.98

    So ignoring a small rounding error of 1p, the GMP (COD) and ASP were the same at date of leaving, and it is just the different revaluation that applies to ASP and GMP that has caused them to diverge.

    So the only thing left to clarify is that the company scheme did indeed use fixed rate revaluation (it is highly likely they did). This can be confirmed by looking at a company scheme deferred benefit statement or referencing the calculation of the revalued GMP under the company scheme which should be £132.43.
    I came, I saw, I melted
  • howy22howy22
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    Thanks for everyone's input.

    I'll check with the company's pension department as to which revaluation method they use.

    The haze is beginning to clear.
  • howy22howy22
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    Have just spoken with my pension provider who have confirmed that the GMP element is revalued using Section 148.

    Does this suggest DWP are using the wrong COD figure?
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