Will everyone be notified of their foundation amount in 2016?

greenglide

So, someone with 40 years should have
((40/35) x 144) - rebate derived amount
and not
((35/35) x144) - rebate derived amount

But that can't be right because the Foundation Amount calculated under the new rules cannot be greater than the £144 amount in your calculation. Only the "old rules" calculation can exceed £144 giving rise to the "protected payment" which is uprated by CPI rather than the triple lock.

Deferring after April 2016 won't be as attractive anyway, apparently. Half the current increase per year deferred, I believe.

That is why "The option of deferring loses its shine as well :-(".

I am seriously concerned about the chaos that will reign during the early part of the roll out of this - UC didnt5 work (but is vastly more complex) and STP is very much a "big bang" approach.

gterr

greenglide wrote: »

But that can't be right because the Foundation Amount calculated under the new rules cannot be greater than the £144 amount in your calculation. Only the "old rules" calculation can exceed £144 giving rise to the "protected payment" which is uprated by CPI rather than the triple lock.

Yes, of course, you are right.
So, is the formula wrong?
Should it be

((number of pre-implementation years to a maximum of 35 / 35) x 144) - rebate derived amount

or

[((number of pre-implementation years / 35) x 144) - rebate derived amount] to a maximum of £144


The difference is crucial to us.

greenglide

The definition of the "Amount B" part of the Foundation Amount is "based on pre 2016 qualifying years valued in terms of the single tier pension with any offset for being contracted out".

Only the "Amount A" of the Foundation Amount can arrive at a value that is greater the the £144 amount, that is definite, so the formula is "lacking" somewhat. The whole area of the "rebate derived amount" is somewhat unclear. It is logical and sensible that 35 years of not contracted out contributions (either pre or post 6/4/2016) should give the full STP amount but logic doesnt normally come into these things.

The calculation of these things will become quite complex, especially when some of the quirks are not tidied up before the regulations are put in place.

We live in interesting times!

Triumph13

It looks pretty clear from this document:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/210299/single-tier-valuation-contracting-out.pdf

They definitely seem to do years x 1/35 to a maximum of £144 and then deduct the contracted out deduction. Someone with 35 years not contracted out plus 10 years contracted out would therefore have less than the full STP as a foundation amount on the new scheme method. The argument being that they have the occupational / private pension earned from the contracted out rebate and so should get less than someone who never contracted out. You can argue the fairness, but it seems pretty clear which way they are going.

gterr

Triumph13 wrote: »

It looks pretty clear from this document:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/210299/single-tier-valuation-contracting-out.pdf

They definitely seem to do years x 1/35 to a maximum of £144 and then deduct the contracted out deduction. Someone with 35 years not contracted out plus 10 years contracted out would therefore have less than the full STP as a foundation amount on the new scheme method. The argument being that they have the occupational / private pension earned from the contracted out rebate and so should get less than someone who never contracted out. You can argue the fairness, but it seems pretty clear which way they are going.

Fair enough. Thanks. So no number of additional years of Class 2s or contracted in contributions (pre-implementation) can ever mitigate the effects of those contracted out years? My husband has 45 years: 9 years contracted out and 36 years of Class2s. He'll be worse off than if he'd made no NI contributions whatsoever during the 9 years he was contracted out? (I'm ignoring, just for the present argument, the other benefits that NIs fund.) Seems harsh, but at least that makes things clearer.

greenglide

Yes they can if you have sufficient years left after 6/4/2016".

So in this case the current scheme valuation is the higher of
the two valuations and becomes the Foundation Amount - this per
son receives a pension payable from the State of £118 and a further £74 paid by
their workplace pension scheme. They can build a further 6 qualifying years (thr
ough contributions or credits) until they reach State Pension age. If
they do this they could increase their pension by £24.66 (6x £4.11) and could retire on a single-tier pension of £142.66.

After 2016 they seem to take the foundation amount and increase it by £4.11 for each qualifying year until you reach SPA of reach the maximum amount.

This doesnt look quite the same as having to reach 35 years of contributions which are not contacted out but it looks "similar".

So the amount to be "made up" depends on the amount of "benefit" accrued from being contracted out (based on the amount of earnings) rather than just the number of years of the contracting out. There is logic in that (irrespective of whether it is "fair" or not).

Triumph13

greenglide wrote: »

So the amount to be "made up" depends on the amount of "benefit" accrued from being contracted out (based on the amount of earnings) rather than just the number of years of the contracting out. There is logic in that (irrespective of whether it is "fair" or not).

If you accept that state pension is capped and extra contributions beyond that cap add no more pension, then it's actually quite hard to argue with the fairness of the contracted out deduction. The Govt viewpoint is that you ARE getting the full amount of STP, you are just getting part of it direct from the govt and part the govt has already given you via the NI rebates and should therefore be coming from your occupational / private pension.

On that basis it's actually quite surprising that they are letting us make up the difference in post 2016 contributions.

gterr

greenglide wrote: »

Yes they can if you have sufficient years left after 6/4/2016".

He'll only have two years after 2016 before retirement. I'll have five.

So the amount to be "made up" depends on the amount of "benefit" accrued from being contracted out (based on the amount of earnings) rather than just the number of years of the contracting out. There is logic in that (irrespective of whether it is "fair" or not).

Oh crikey, so the rebate derived amount will not be determined by a simple formula like 4.11/4 per year contracted out?

A bit of a conundrum for us. We have sold a small business and could stop paying Class 2s now. We do have a small amount of income from another source that we could legitimately designate as a trade and therefore continue paying Class 2s until retirement. That could mean that the next two years' worth of Class 2s would be wasted, but might be made worthwhile by the additional 2 years (or 5 in my case) after 2016. That would be cheaper than paying voluntary Class 3s. I guess we could stop paying Class 2s now and then re-register as self-employed after 2016, but surely that would look suspicious to HMRC.

I'm not complaining about the new scheme. I know we cannot be worse off than we would have been with the old one. What I don't like is the uncertainty, which affects us badly since we are close to retirement. I am trying to be prudent because we will have a low income anyway in retirement. I'm trying to do all I can to maximise it.

Linton

gterr wrote: »

Fair enough. Thanks. So no number of additional years of Class 2s or contracted in contributions (pre-implementation) can ever mitigate the effects of those contracted out years? My husband has 45 years: 9 years contracted out and 36 years of Class2s. He'll be worse off than if he'd made no NI contributions whatsoever during the 9 years he was contracted out? (I'm ignoring, just for the present argument, the other benefits that NIs fund.) Seems harsh, but at least that makes things clearer.

Surely if he already has 36 contracted-in years he will have enough in SERPS/S2P so that the Foundation calculation is based on the old rules. And he has the benefit of the 9 years contracted out money in the form of an extra pension or as part of a DB pension scheme. The rebate just reflects money that has already been paid out, it isnt a penalty..

greenglide

Of course the "rebate derived amount" depends on whether the contracting out was pre or post 87 / 97 etc as the calculation of the COD is different and is dependent on the level of earnings during the period of contracting out.

If you are lucky it may be small.