Effect of contracting out on flat rate pension

wotsthat

Just trying to run some calculations but realised I don't fully understand the effect of contracting out on state pension entitlement.

I've been contracting out for c25 years into a private pension.

Do these years count towards the 35 qualifying years I'll need to claim the full flat rate pension.

I read here that people in my situation are potentially big winners from the changes - why?

greenglide

If you have been contracted out then when your "Starting Amount" is calculated the calculation when the new rules are applied will be decreased by the "Rebate Derived Amount". The amount of this will depend on your earnings during the period of contracting out.

The impact of this depends on your age (so that you can gain additional qualifying years after STP starts in 2016) and the saze of your starting amount calculated under the old rules. If you have a pensions forecast and this is higher than you "standard" amount of STP (was quoted as £144, look at the single person pensions credit guarantee amount as it must be higher than that) then you will get at least that amount.

wotsthat

So, in today's money I'd get either £113.10 or, say, £144 minus the 'rebate derived amount' - whichever was the larger?

If that's the case I can see why I'm possibly a winner - the contracted out part of my pension should provide a pension in excess of the £1600 year difference.

Do I benefit from the, potentially, next 20 years of NI contributions?

FatherAbraham

wotsthat wrote: »

Do I benefit from the, potentially, next 20 years of NI contributions?

No, from a pension perspective. You'll only benefit up to the time you've achieved the full flat-rate state pension.

At that point, you would do well, ceteris paribus, to start working in another EEA country (Ireland and Malta are mostly English-speaking), so that you can accumulate more state pension benefits in their scheme.

Warmest regards,
FA

greenglide

So, in today's money I'd get either £113.10 or, say, £144 minus the 'rebate derived amount' - whichever was the larger?

That depends on whether you have and Graduated Pension from the 70's or any AP from SERPS/S2P from any periods not contracted out. These would increase the old rules calculation. You would then get the higher of the two plus one thirty fifth of the STP amount for each year you have between 6/4/2016 until SPA. I doesnt look as though you will get anything over this if you havent got any significant SERPS/S2P.

wotsthat

greenglide wrote: »

That depends on whether you have and Graduated Pension from the 70's or any AP from SERPS/S2P from any periods not contracted out. These would increase the old rules calculation. You would then get the higher of the two plus one thirty fifth of the STP amount for each year you have between 6/4/2016 until SPA. I doesnt look as though you will get anything over this if you havent got any significant SERPS/S2P.

I contracted out of serps/ S2P pretty much when I started work in the eighties and stayed like that until 2012 so there are no periods when I wasn't contracted out.

It's the next 20 years I'm still puzzled about and whether or not the NI contributions are going to increase entitlement to a pension above the minimum income guarantee. Seems to me budgeting for a figure closer to £113 rather than £144 is the safest route.

greenglide

If you have a current pension forecast from DWP you will get, at a minimum, the value on that.

Post 6/4/2016 this will increase by 1/35 of the STP amount up to the maximum which could remove the impact of the rebate derived amount.

jamesd

The flat rate state pension maximum is set at a level of £144 (or more likely £155 after adjusting that earlier number for inflation by the time it's introduced). That level is the one that will be reached by a person who pays in for 35 years under flat rate rules.

What will happen at transition is that each person is assigned a foundation amount that is the higher of the current or new rules levels for the working life they have so far. Then each year then work continues to increase their flat rate pension until they reach the £144 level, at which point it stops increasing.

For a person who was never contracted out it will roughly be 35 years of work, ignoring the difference between old and new accrual rates. All years worked in the UK above that gain them nothing.

A person who was contracted out will keep their contracted out pot and start with a lower foundation amount than the person who is contracted in. They have the same maximum potential flat rate pension income and theirs will continue to increase until they get there or reach state pension age. They won't stop accumulating more after 35 years, instead they continue to grow their benefits for longer.

So the contracted out person will ultimately end up with the full state pension plus their contracted out pot while the contracted in person will get just the state pension. The contracted out person ends up better off.

A person who is contracted in can do things like working abroad or not working that could see them continue to get more flat rate pension for the number of years worked here until they get to that 35 years, or really the pension income level. Like the contracted out people, the worked abroad and accumulated benefits elsewhere people are more likely to be winners than losers. I'm in this category, both abroad and contracted out, not many contracted in years.

The losers are those who are contracted in for a full working life. Their state pension level for doing that for a life under the new system would fall from around £190 at a low income to £250 at a high one to the flat rate level. The money is taken from them and given to those who don't work as much, long term unemployed, those not working but paying voluntary NI or getting child benefit and such. As usual for "progressive" tax setups it's taking money from the long term workers at around normal and higher income to give it to the rest.

Since you contracted out when you could and still have time to get to the full flat rate pension you'll be one of the bigger winners under the flat rate system, particularly if you retire early after only just reaching the flat rate income level.