Serps/s2p

Southend1

Quick question. I'm in my 30s. By the time I can eventually claim my state pension (if I live that long!) I will get the flat rate state pension. I'm currently in a contracted out DB scheme but for about 5 years I was contracted in. Would I still get some S2P when I retire or will it just be the flat rate?

jamesd

In practice the S2P will make no difference at all to what you receive. This is because the flat rate cut to pensions for employees caps the amount of state pension that can be accumulated at £144 a week.

What will happen is that your Foundation Amount in 2016 will be calculated on the basis of current and new ways. You get the higher of the two calculations. Then future years increase your entitlement by a fixed amount each year until you reach the cap. So all a higher starting amount below £144 does is decrease the number of years it takes to reach the cap.

You are in the prime "loser" category from the change. The prime winners are those who haven't worked much in the UK, those who contracted out and still can work enough years to get to £144 and the self-employed. More neutral are those who are close to state pension age. The closer they are, the less they lose, because their pension will stop increasing once the new scheme comes in if they have £144 already, but they keep anything above £144 that they already have.

What is happening in part is that means tested benefits for pensioners, the Minimum Income Guarantee, that are currently paid out of general taxation paid by all of us, including the retired, are being replaced by the flat rate state pension using cuts in the pension accumulated by younger employees to fund it. This is being done by lifting the minimum state pension paid for out of NI to above the means test level. What this does is produce a one-time gain for those retired or retiring soon, lower tax increases while retired, paid for by the children and grandchildren through lower state pension accrual but the same NI payments.

Southend1

Ok thanks for the detailed answer. Probably swings and roundabouts because although I was contracted in for 5 years I've also been contracted out for 5 years too.

jamesd

The contracted out part is good. You're still young enough that you'll be a clear loser overall, though, unless you spend a lot of time outside the UK or not working. To give some context, even a low paid employee with a full working life would get around £190 a week under the current system. Five years of being contracted out isn't going to pay you enough to compensate for the difference between that and £144 unless you make spectacularly good investments.

Southend1

jamesd wrote: »

The contracted out part is good. You're still young enough that you'll be a clear loser overall, though, unless you spend a lot of time outside the UK or not working. To give some context, even a low paid employee with a full working life would get around £190 a week under the current system. Five years of being contracted out isn't going to pay you enough to compensate for the difference between that and £144 unless you make spectacularly good investments.

To be honest I doubt I'll still be alive when I reach state pension age so it's moot in that sense. Clearly everyone of my generation and younger has very little hope of having a retirement in the sense that my parents and grandparents understood it.

mania112

Contracting out will continue in DB schemes, won't it?

So the OP will be better off than someone not in a CO-DB scheme?

EDIT: Inasmuch as those benefits won't be 'lost' when in comes to state pension changes.

Southend1

No I think contracting out is due to end in a year or so time?

jem16

Southend1 wrote: »

No I think contracting out is due to end in a year or so time?

Correct. It's due to end for DB schemes in 2016 when the new flat rate state pension comes in.

dunstonh

Southend1 wrote: »

To be honest I doubt I'll still be alive when I reach state pension age so it's moot in that sense. Clearly everyone of my generation and younger has very little hope of having a retirement in the sense that my parents and grandparents understood it.

Yet the evidence supports a different point of view. When the state pension was introduced, the average life expectancy was just 2 years later. Currently it over 20 years. The proposed age changes keep it in line with 20 odd years.

You can have the retirement you desire. You just have to prepare for it. At no point has the state pension alone been enough for most people to live on. It is there to give you at least a breadline minimum. Some people in the right places in the country and a frugal lifestyle may get by but for most, additional provision has always been required. Also, whilst occupational pensions have been in decline and replaced with schemes requiring greater contributions from the employee, the living standards are generally far higher than earlier generations thanks to higher relative wages/benefits.

jamesd

Southend1 wrote: »

To be honest I doubt I'll still be alive when I reach state pension age so it's moot in that sense.

Here are the cohort life expectancies for males of various ages, using the 2010-based principal projection for the UK from the Office of national Statistics:

Age     Life                Die
now    expectancy    at
0         90.8              90.8
10       79.8              89.8
20       68.4              88.4
30       57.3              87.3
40       46.5              86.5
50       35.9              85.9
60       26.0              86.0
70       17.3              87.3
80       10.0              90.0
90        4.9               94.9

Females are around two or three years more at each age. Unless you've some personal medical factor it's very likely that you'll live to reach state pension age and likely that you'll live for ten to twenty years after it. But of course you don't have to wait until then to retire, just plan ahead and it's not too bad to arrange to retire earlier. Depends on target income and how keen you are to get there.

Southend1 wrote: »

Clearly everyone of my generation and younger has very little hope of having a retirement in the sense that my parents and grandparents understood it.

No, but that's partly because they can expect a much better one than the grandparents, as can the parents.

For those in the 40s and younger, as well as many in their 50s, the effective ending of final salary pensions except in the public sector will make a huge difference. That will produce big differences in how well off those who pay attention to retirement planning are compared to those who don't pay attention, because there's now more choice and opportunity to get things wrong.

You can still do very, very well for yourself, though. I'll assume that you're 35 for this and use the long term average of 5% after costs plus inflation for the UK stock market as well as the reasonable 5% of capital as income value. Put £50 a month, 30 years and 5% into a regular savings calculator and the total at age 65 is £41,612, enough to produce £2,080 a year of income for life. £50 a month costs £40 a month allowing for basic rate tax relief, and you need to increase it with inflation.

So, subtract about £7,500 for the state pensions from your income target and divide by 2080 then multiply by 40 to get your monthly pension contribution to have a reasonable chance to get there. Then add 50% to get a nice safety margin. To give you some idea, the median average pensioner income today is about £18,000.

If you want to retire earlier, change the number of years.

You'll also need to allow some more to provide for the missing state pension. I ignored that at age 65 but I shouldn't really have done.

Southend1

jamesd wrote: »

Then add 50% to get a nice safety margin.

This is precisely what the government needs to address if it wants to get people saving for retirement. Ordinary people just can't afford to save into schemes where the results are so unpredictable that they need to save 50% extra to be sure they will have enough pension to live off. Too late now they and greedy bosses have killed off DB schemes.

I don't believe we will all live to 90+. With the NHS being slowly privatised people won't have the kind of healthcare enjoyed by our parents. It's also likely there will be war, pestilence, famine etc that will kill off a good number of people over the next 40 years. The last 40 years may have been relatively benign but as they say past performance is not a guarantee the future will bring more of the same.

The likely scenario is that we will do our best to save what we can but retirement age will keep getting further and further out of reach as the UK declines in favour of countries like China and the rich continue to grab an ever increasing share of what wealth we do have. And it's unlikely there will be a state pension by the time I reach my 70s. So the future is pretty grim.

Anyway that's my view.