Early Retirement and State Pension

Uglymug

I’m looking for some advise from someone with more knowledge of the State Pension system than myself.

I’ve recently taken early retirement at age 57.

I’ve requested and just received my State Pension forecast.

It estimates that my State Pension based on NI contributions to April 2013 is £155.97 per week payable from my 66th birthday in April 2022. This is made up of £110.15 per week for having 40 qualifying years and £45.82 per week additional State Pension and Graduated Retirement benefit. The forecast ends by stating that each extra qualifying year I have between now and State Pension age is worth at least £1.75 per week additional State Pension.

I spent some of my employment (I think about 14 years) contracted out of the 2nd State Pension.

I’m slightly confused as to what State Pension I’ll actually receive from April 2022. Will it be £155.97 and is this amount index linked between now and then? Or will I receive the single tier State Pension of £144.00 (introduced from 2016) which I presume is definitely index linked. Will there be any reductions due to my being contracted out during some of my 40 years of employed life?

Also, is there anything I could be doing to gain the extra qualifying years for the mentioned £1.75 per week additional State Pension? (I’ve taken various pensions early and have not bothered registering myself as unemployed or anything).

Many thanks in advance for any advice.

　

SnowMan

It is highly probable that the additional state pension of £45.82 already takes into account contracting-out. That is the figure of £45.82 would have been higher but for the contracted-out period.

What is happening behind the scenes is that for periods prior to 6/4/97 they work out the additional state pension you would have had had you been contracted-in throughout and subtract a contracted out deduction for the period before 6th April 1997.

So making up figures it could be that your additional state pension is £100 - £54.18 = £45.82. Some state pension statements just show the resulting figure, £45.82 here, and not this breakdown.

Under single tier transitional arrangements if the current state pension is more than £144 pw (the exact amount has not been set as that is a 2012/2013 figure) then you just get what you have earned under the current system £155.97pw in your case.

How the £155.97 increases (or not) between now and 2016 when the transitional calculations are done is impossible to say. In the made up example the deduction of £54.18pw could be increasing at a rate (up to 8.5%) higher than the amount of £100. What that can be mean is that the overall state pension could increase at a rate less than price inflation and at the very extremes it could even reduce. If you are subject to this quirk it will only be relevant for the increases up to 2016 not afterwards.

After 2016 the first £144 increases in line with the state pension triple lock guarantee, i.e the higher of inflation, average earnings or a minimum of 2.5% (unless the triple lock is removed), and the balance of £11.97 with CPI price inflation.

We would need to know the make up of your contracted-out period to comment further. What period did it relate to? Was it a (final salary) company scheme or a personal pension through which you were contracted-out? If it was a company scheme it depends on the rate that the scheme revalues your contracted-out benefit (known as GMP) after you left.

There is no obvious way for you to increase your state pension (except for any additional pension earned between now and 2016 through say paid work) as you already have over 35 qualifying years. As it is highly likely that your protected pension at 2016 will be more than the single tier amount there will be no prospect of increasing this after 2016 either.

(All assumes that the state pension proposals are implemented)

Uglymug

Hi Snowman

Many thanks for your extremely helpful reply.

I was contracted out whilst working for a private company between 1988 and 2002 which provided a final salary company pension.

Basically, as I understand it, if I was going to receive the single tier pension of £144.00 this would be subject to a reduction for my being contracted out for 14 years.

However, the higher pension of £155.97 has already factored in the 14 years I was contracted out so my state pension should be based on this (I very much hope you're right).

It seems, for someone in my position, the younger they are the less state pension they will get. I’m, hopefully, fortunate enough to hang on to the old scheme (that is until the next change is announced).

SnowMan

Uglymug wrote: »

I was contracted out whilst working for a private company between 1988 and 2002 which provided a final salary company pension.

You shouldn't be hit too badly (if at all) by the quirk I mentioned earlier because

a) GMPs ceased to accrue after 6th April 1997 so only the 1988 to 1997 period is potentially affected by the 'quirk', and

b) because the rate at which the made up £54.18 increases isn't probably going to be high enough to cause a massive 'quirk' effect. This would be even more so the case if you left after 6th April (in 2002) when the maximum rate it could increase went down.

So the £155.97pw should hopefully increase between now and 2016 (although there is still too little info to be precise)

However, the higher pension of £155.97 has already factored in the 14 years I was contracted out so my state pension should be based on this (I very much hope you're right).

Correct. My only very slight doubt is if you have misinterpreted your state pension forecast. However it should be obvious from the statement. Ring them up if you have any doubt what it says on the statement. They may be able to tell you the breakdown of the £45.82, if you ask, for example the £100 - £54.18 in my made up example. They will probably separate out additional pension before and after 97 in this breakdown so expect an A + B - C type of breakdown.

In terms of the flat rate transitional arrangements then your state pension at 2016 will be calculated as the maximum of i) the amount had the new state scheme been in place throughout your working life (with an allowance for contracting-out) and ii) your accrued entitlement under the existing state scheme i.e. the maximum of:

i) £144 (for 35 qualifying years) less the rebate derived amount (contracted-out deduction) for the period 1988 to 2002

ii) Your current state pension of £155.97

Clearly ii) is higher regardless of how much the rebate derived amount is.

xylophone

I was contracted out whilst working for a private company between 1988 and 2002 which provided a final salary company pension.

What has happened to this pension?

Uglymug

xylophone wrote: »

What has happened to this pension?

Whilst contributing to this final salary pension I also paid in to some AVCs (with Equitable Life) - so I'm not really sure if my NI rebate went to my company final salary scheme or to my Equitable Life AVC scheme.

Again, to Snowman, many thanks for all your help.

I've going to ask for a State Pension statement every April to keep an eye on it, apart from that there seems to be nothing else I need to do. I'd kick myself if in 8.5 years time I found I needed to be doing something now (like signing on for a stamp or something).

xylophone

Have you drawn the FS pension?

When you left the company, were you given a statement showing your pre and post 88 GMP at leaving?

How does your scheme revalue a GMP in deferment? http://www.barnett-waddingham.co.uk/news/2012/07/what-is-a-gmp/

This archived content might be worth a look.http://webarchive.nationalarchives.gov.uk/20080814090418/direct.gov.uk/en/MoneyTaxAndBenefits/PensionsAndRetirement/CompanyPensions/DG_10028150