One for the SERP’s/Contracted-out deductions (COD) experts

benny5

My SP is due to commence in March and I have just had a breakdown of my entitlement.


The Basic State Pension element (£113.10) is straightforward. It’s the additional entitlement that I am seeking clarification on. I was contracted-out of SERP's for a period in the late 80’s/early 90’s, this was a standalone plan and not linked to my company plan.


So the breakdown of my additional SP looks like this;


Pre 97 additional State Pension = £x -£y. (y being the COD amount)


Post 97 Additional State Pension = £x.


Graduated Retirement Benefit = £x.


Question 1). Is the COD value calculated on a ‘once off’ basis, at the commencement of SP payments, or is it reviewed/amended annually in line with pension increment.


Question 2). In the event of pension deferral, how are these (Non Basic Pension) treated. I can see that the BSP is currently subject to the triple lock (2015/16 set at 2.5%). Also, the increment for some of the other elements is projected to be 1.2% (2015/16). But it’s the changes to the COD that concerns me most.


Any input greatly appreciated.

xylophone

I was contracted-out of SERP's for a period in the late 80’s/early 90’s, this was a standalone plan and not linked to my company plan.

What kind of stand alone plan? An APP?

From Contracting out of the State Second Pension
Standard Note: SN/BT 4822
Last updated: 23 March 2011
Author: Djuna Thurley
Section Business and Transport Section


2.2 Contracting out and Defined Contribution (money purchase) schemes
The Social Security Act 1986 introduced changes to SERPS and contracting out from April1988. In particular, contracting out in Defined Contribution (DC) and appropriate personal pensions (APPs) was permitted and, indeed, encouraged.

Prior to April 1997, a “minimum payment” (“minimum contribution” in the case of APPs) equal to the contracted-out rebate had to be made to the scheme.

Interaction with the State Pension

As DWP explains, the way in which contracted-out money purchase schemes interact with the state scheme changed in 1997:

Pre-April 1997 rights

Contracting out for DC schemes was first introduced in 1988 and a person who was contracted-out pre-1997 is still treated as having an entitlement to the State Additional Pension, so a mechanism exists to avoid double provision. This is catered for by the Contracted-Out Deduction (COD).


For the purpose of adjusting their State pension entitlement, it treats a person contracted out through a DC scheme as though they had contracted out through a Defined Benefit occupational pension scheme and built up a Guaranteed Minimum Pension (GMP).

This enables a definite and uniform method of calculation of the COD to be applied. When a scheme member dies, their survivor is entitled to all or part of the deceased member’s State pension rights and where the member was contracted out-pre-1997, a COD is also applied to the survivor benefit."

From the above, it would appear that the COD on your pension will be treated like a post 88 GMP. If so, the pre 97 AP figure on your Pension Statement will be increased annually by CPI and the COD figure annually by CPI up to 3%.

The one will be subtracted from the other and what remains is your pre 97 AP.

However, I am no expert so you should check with the DWP.

The triple lock applies only to the basic state pension - other elements increase by CPI.

See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

concerning deferring state pension.

benny5

I appreciate your very detailed response.

xylophone wrote: »

What kind of stand alone plan? An APP?

Well the documentation refers to it as ‘HSBC DC Group Pension’.

xylophone wrote: »

Pre-April 1997 rights

Contracting out for DC schemes was first introduced in 1988 and a person who was contracted-out pre-1997 is still treated as having an entitlement to the State Additional Pension, so a mechanism exists to avoid double provision. This is catered for by the Contracted-Out Deduction (COD).


For the purpose of adjusting their State pension entitlement, it treats a person contracted out through a DC scheme as though they had contracted out through a Defined Benefit occupational pension scheme and built up a Guaranteed Minimum Pension (GMP).

This enables a definite and uniform method of calculation of the COD to be applied. When a scheme member dies, their survivor is entitled to all or part of the deceased member’s State pension rights and where the member was contracted out-pre-1997, a COD is also applied to the survivor benefit."

From the above, it would appear that the COD on your pension will be treated like a post 88 GMP. If so, the pre 97 AP figure on your Pension Statement will be increased annually by CPI and the COD figure annually by CPI up to 3%.

The one will be subtracted from the other and what remains is your pre 97 AP.

However, I am no expert so you should check with the DWP.

If my understanding of the situation is correct then the figures will only diverge when CPI exceeds 3% (if that ever happens) and then it would be to my advantage.

Once again many thanks.

benny5

If I could ask another question regarding C O D.


Looking a little more closely at my final SP figures I am wondering how the COD value is actually calculated. Is it as simple as a universally applied standard value or is it based on the income from my contracted out (DC) pension.

xylophone

Your GMP value is individually calculated and this is the basis of the COD value applied to your state pension.

https://forums.moneysavingexpert.com/discussion/4532605

See post 12