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Additional state pension - is it lost?

Hello

I had a state pension forecast a while ago and it calculated £170 per week (in today's money), that was based on basic state pension plus additional amount.

I was born in 1971, due to retire at 68.

Have worked full time paying tax/nic since 1988 and have never claimed any state benefits whatsoever.

My friend tells me under the new rules of the flat rate pension of £144 per week, starting in 2016 that I will lose the extra state pension I have built up and will eventually only qualify for the flat rate. Is this true?

I tried to research it but am confused as it says you need 35 years qualifying NIC to protect any additional amounts you are entitled to but I wasn't sure if that's 35 years by the time you retire or 35 years at the 2016 introduction date. At 2016, I will have been working 28 years.

thanks for any advice.
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Comments

  • Linton
    Linton Posts: 17,935 Forumite
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    toby_puppy wrote: »
    Hello

    I had a state pension forecast a while ago and it calculated £170 per week (in today's money), that was based on basic state pension plus additional amount.

    I was born in 1971, due to retire at 68.

    Have worked full time paying tax/nic since 1988 and have never claimed any state benefits whatsoever.

    My friend tells me under the new rules of the flat rate pension of £144 per week, starting in 2016 that I will lose the extra state pension I have built up and will eventually only qualify for the flat rate. Is this true?

    I tried to research it but am confused as it says you need 35 years qualifying NIC to protect any additional amounts you are entitled to but I wasn't sure if that's 35 years by the time you retire or 35 years at the 2016 introduction date. At 2016, I will have been working 28 years.

    thanks for any advice.


    You dont lose your additional state pension. When the new scheme comes in the old scheme is scrapped completely and your £/week starting point is reset to the maximum of what the £/week would be under the new scheme and what you have paid for under the old. This £/week is then incremented each year under the new scheme. Things get more complex if you have spent some time contracted-out, but that's for another thread.

    The 35 years is the total by the time you take the state pension.
  • Linton wrote: »
    You dont lose your additional state pension. When the new scheme comes in the old scheme is scrapped completely and your £/week starting point is reset to the maximum of what the £/week would be under the new scheme and what you have paid for under the old. This £/week is then incremented each year under the new scheme. Things get more complex if you have spent some time contracted-out, but that's for another thread.

    The 35 years is the total by the time you take the state pension.
    Thank you Linton
  • just wanted to clarify something, I found a forecast dated 5.4.11, which states:

    at 5.4.11 I have 24 qualifying NI years.

    basic pension 81.72
    additional pension 24.50
    total weekly state pension 106.22

    that was in 2011 money.

    my question is this, in the last two years my figures won't have gone up that much, but in 2016 do I lose the £24.50 additional pension I have accrued?

    ie. would I just get the new flat rate pension because that's higher than the £106.22 total or would they take the additional pension as a separate element and be able to protect it?

    just seems unfair if people are going to lose the money that they have already accrued pre 2016, although I understand that you can't accrue more after that date.
  • jamesd
    jamesd Posts: 26,103 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    Since you appear not to be close to retiring and do not have more than £144 in basic and additional state pensions at the moment, in effect you lose it.

    The flat rate state pension is capped at £144. Once you get there you get no more. So all having a higher starting point below 144 does now is reduce the number of years it takes to get there.

    So you don't actually lose it immediately but since you don't gain from it, in effect it's lost.

    Those who won't have enough working years between the flat rate coming in and state pension age to get to £144 wouldn't lose it, because they still wouldn't reach £144 so no cap for them. But I can see that this isn't likely to apply to you.

    Those who have more than £144 when it comes in do get to keep the extra, though the part above £144 has a lower likely inflation linking.
  • elantan
    elantan Posts: 21,022 Forumite
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    This has happened to myself as well ... We are in the unfortunate position of being shafted by the new legislation ( as are millions with us) my husband opted out and thankfully by the time he retires he should have worked enough to get his £144 ( or whatever it is at the time) where as he was just entitled to the basic ( think it was £109 a week last time I looked) with very little SERPS

    I am angry about it but there is nothing I can do about the lost money it sucks but what can you do

    Personally speaking I am waiting till 2016 then I will get a new forecast and see where we stand from there
  • So it looks like have many of us paid into SERPS/SP2 for no reason at all? Feels like we should get a refund of what we've paid in if we aren't going to benefit from it!

    Does this mean from 2016 that we will pay less NIC on our wages if they are scrapping the second state pension?

    The auto enrol in my work probably won't start until 2016 due to there being only 3 employees there. If my earnings are 24k gross and 1590 per month net, what sort of amount will they deduct to put into the auto enrol and what sort of return would that provide, retiring in 2038?

    I'm guessing it would probably still be less than the combined flat rate pension and what I have already accrued in second state pension. :eek:
  • p00hsticks
    p00hsticks Posts: 13,955 Forumite
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    toby_puppy wrote: »
    So it looks like have many of us paid into SERPS/SP2 for no reason at all? Feels like we should get a refund of what we've paid in if we aren't going to benefit from it!

    My understanding is that those who were 'contracted out' of SERPS/SP2 will have money deducted from the £144 if they have not got 35 'non-contracted out' years.
  • jamesd
    jamesd Posts: 26,103 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    edited 11 December 2013 am31 11:11AM
    toby_puppy wrote: »
    So it looks like have many of us paid into SERPS/SP2 for no reason at all?
    For SERPS/S2P that's roughly right but it's going to be used to subsidise the higher state pension for those who haven't worked much or the self-employed who pay less NI. So the money taken from your potential pension is going to be used to replace means tested benefits - the Minimum Income Guarantee and Tax Credits - that would have been paid out of general taxation instead.

    NI as a whole still has value because it's used to pay for things like the NHS and various means tested benefits as well.
    toby_puppy wrote: »
    Does this mean from 2016 that we will pay less NIC on our wages if they are scrapping the second state pension?
    No. The second state pension money is to be used for the subsidy for those who don't work for many years.
    toby_puppy wrote: »
    If my earnings are 24k gross and 1590 per month net, what sort of amount will they deduct to put into the auto enrol and what sort of return would that provide, retiring in 2038?
    The highest level starts from 2018 and it's 5% gross from you, 4% after allowing for tax relief, plus 3% from your employer. It doesn't have to be calculated on the full salary but if it was it would be £80 net reduction in your take-home pay. For the first few years it'll be less than that.

    With age 42 now and assuming a state pension age of 69 by the time you get there, that's 27 years. I'll assume that you don't start until 2016 and use the 2018 numbers, so 26 years of 8% gross, £1,920 a year or £160 a month. Historic return of the main UK stock market has been 5.2% plus inflation and I'll cut that to 4.7% to allow for charges. Putting that into a regular savings calculator gets a pension pot worth £97,500 in today's money. Pension income using income drawdown can pay out perhaps 5% of that, so £4,875 a year, £406 a month. Life expectancy for males at age 69 is likely to be about 21 years, or more. So 26 years of £80 net gets you about £325 a month net for 21 years, all in today's money.

    Add the £144 a week in today's money from the flat rate state pension and that takes you to £12,363 a year, £1,030 a month or £237.75 a week, a bit higher after tax because I took more than I needed to off the work pension.

    The median average pensioner income is about £18,000 before tax a year. To get to that you'd need to add enough to pay out £5,637 with only basic rate tax relief, no employer contribution. That takes a pension pot of around £112,740. To get to that you'd need to pay in £185 a month gross, £148 net.

    So total to get median average pensioner income would be around £228 net cost to you a month. And all of that combined would be paying you about £16,400 a year after tax with a personal allowance of £10,000. About £1,367 a month or £315 a week.
  • jamesd
    jamesd Posts: 26,103 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    elantan wrote: »
    We are in the unfortunate position of being shafted by the new legislation ( as are millions with us) my husband opted out and thankfully by the time he retires he should have worked enough to get his £144
    That makes him one of the winners, not one of the shafted. He'll get to the £144 and he'll get to keep the personal pension or work pension he got from the contracting out money.

    Most of those who were contracted out will turn out to be winners because of that keep the contracted out bit but also get up to the £144 treatment.

    The biggest winners are:

    1. Those who spend a life on means tested benefits. The more time on benefits, the more the win.
    2. Those who were self-employed most of their working life.
    3. Child benefit recipients who worked around 14-20 years as well, though even with no work they are winners.
    4. Those who were contracted out and work enough years or buy enough years to get up to £144 plus keeping their contracted out pension.

    The biggest losers are:

    1. Higher PAYE earners who work a full working life. Under current rules they could get up to around £250 a week in state pensions.
    2. Just about everyone else under age 40-45 or so who ends up capped at £144. A low earner for a full working life would get about £190 a week under the current system, not £144.
  • wow jamesd that is most helpful, certainly makes things a lot easier to understand, I realise that nothing is "exact" when it comes to pensions, but a good starting point for planning.:T

    Do you know anything about ISA's, ie if I saved into an ISA every year instead of a pension plan would I be able to get a similar return to the shortfall you mentioned, ie the £5637 per year payout.

    It's just that ISA's sound more appealing to me because of their flexibility and with me starting at age 42. I was thinking of trying to pay £200 per month minimum into an ISA from now on.

    Don't worry if it's too complex to work out, I wouldn't have any idea how to do a rough calculation of this.

    Thank you.
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