State Second Pension entitlement

TrickyDicky101

I am 41 years old and have contributed to the State Second Pension and SERPS before that (although SERPS will be very small).

Given the change to the flat rate pension and that I won't retire for a number of years, do I retain any entitlement to the accrued S2P when I finally do retire or has that been lost?

Linton

TrickyDicky101 wrote: »

I am 41 years old and have contributed to the State Second Pension and SERPS before that (although SERPS will be very small).

Given the change to the flat rate pension and that I won't retire for a number of years, do I retain any entitlement to the accrued S2P when I finally do retire or has that been lost?

When the new pension scheme comes into effect you will be assigned a "foundation" amount which is the maximum of:

(assume that the current SP is £108 and the new one £145)

a) What you would have earned had the new scheme been in place = £145 X NI/35 This is then reduced to allow for any years you were contracted out.

b) What you have earned under the old scheme = £108 X NI/30 + Net S2P +SERPS.

You can then continue to accrue extra NI years until your income reaches the £145. So, the net effect is probably to reduce the NI years needed for the full pension rather than give you extra pension.

The justification is that you were contributing in the expectation of getting £108 but will actually be getting a higher amount. Thus some/all of your S2P is sort of included in the higher than expected basic state pension.

TrickyDicky101

Thanks Linton - much appreciated.

greenglide

You have over 25 years before reaching SPa - much can change during that time.

It is technically possible that your "starting amount" for nSP (it is not "flat rate" - it is a "single tier" called "new State Pension") is more than nSP full rate. If that were the case you would get the amount by which you exceeded the full rate, uprated by inflation (CPI, not the triple lock) as the "Protected Payment" on top of the full rate nSP providing that you had 35 or more qualifying years.

To get a starting amount greater than the nSP full rate would require a huge amount of SERPS / S2P Additional Pension, especially since you cannot reach the full basic pension by 2016 because of your age.

So you will not benefit directly from your AP accrued however the amount of you starting amount probably means that you dont need to have the full 35 years contributions to get the full nSP.

So you havent lost in any way and you may still be better off under nSP as the full rate of nSP will be greater than the current Basic Pension so if your AP (current and future) would not have exceeded some £35 you are still better off.

Like all changes everyone can't win. You havent lost.

p00hsticks

Linton wrote: »

When the new pension scheme comes into effect you will be assigned a "foundation" amount which is the maximum of:

(assume that the current SP is £108 and the new one £145)

a) What you would have earned had the new scheme been in place = £145 X NI/35

b) What you have earned under the old scheme = £108 X NI/30 + S2P +SERPS. This is then reduced to allow for any years you were contracted out.

Are you sure about this (the bit highlighted in bold) ?

My understanding was that the deduction for contracted out years is applied as part of the calculations for the new scheme, not the old.. so basically old scheme is 'basic rate plus potential extra (S2P, SERPS) arising from being contracted in', whislt new scheme is '(higher) flat rate minus potential deduction arising from being contracted out'

xylophone

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/210299/single-tier-valuation-contracting-out.pdf

Linton

p00hsticks wrote: »

Are you sure about this (the bit highlighted in bold) ?

My understanding was that the deduction for contracted out years is applied as part of the calculations for the new scheme, not the old.. so basically old scheme is 'basic rate plus potential extra (S2P, SERPS) arising from being contracted in', whislt new scheme is '(higher) flat rate minus potential deduction arising from being contracted out'

Thanks - wording changed.

wakeupalarm

At 41 years of age you are one of the big potential losers out of the capped rate pension. For someone your age, who has been working on average earnings will have built up s2p/Serps of an amount close to but probably short of the new capped rate pension.

After 2016 you will continue to build up roughly £4.40 per year whilst you work/claim certain benefits until you reach the 35 qualifying years or hit the cap, which ever is sooner.

Once you reach 35 qualifying years your pension will be capped at the new rate and you will not be able to build up any more state pension. Under the old scheme you would have continued to build up s2p/serps until you retired or reached £270ish total state pension.

If you were previously contracted out then you're a winner as after applying the deduction for contracting out you will be able to build up further pension at £4.40ish for longer until you reach the cap.

If you were older then 45 then you're generally a winner.
If you were younger then 45 then your future potential pension has been capped at the new rate or your current entitlement if higher.

jamesd

TrickyDicky101 wrote: »

I am 41 years old and have contributed to the State Second Pension and SERPS before that (although SERPS will be very small). ... Given the change to the flat rate pension and that I won't retire for a number of years, do I retain any entitlement to the accrued S2P when I finally do retire or has that been lost?

It's effectively lost for you and all others in a similar situation.

The problem is that under the flat rate rules the pension stops increasing when you reach the flat rate. Under current rules only the basic state pension part stops growing after 30 years while the earnings-related additional state pension part continues to increase as long as you're paying NI.

All that happens for those who have some ASP entitlement today is that they reach the flat rate level sooner and stop gaining more from working longer sooner. Look on it as a state incentive to retire early.

If for some reason you don't work enough years to get to the full flat rate level you will retain the benefit of the ASP. This is most likely to apply to those serving long prison sentences, spending long times on means tested benefits, those choosing not to work and those with long times outside the UK.

Under current rules even a person on a low wage for life would end up with a state pension of around £190 a week, with £250 or more possible.

Those who are fairly close to state pension age today do retain the benefit of the ASP if it puts them over the flat rate level because the foundation amount will include that. They just don't gain any more for continuing to work, so the farther you are from retiring the worse it gets: more years worked without any gain.

greenglide

The problem is that under the flat rate rules the pension stops increasing when you reach the flat rate. Under current rules only the basic state pension part stops growing after 30 years while the earnings-related additional state pension part continues to increase as long as you're paying NI.

But of course the cash amount continues to increase as benefits increase but no further entitlement is accrued.

jamesd

Yes, if benefits continue to increase the numeric value will continue to increase.