deduction for opting out

datlex

Hi it is quite a while until I retire (25 years at current age). So currently I will be eligible for the new state pension. Back in 1997 when I was much younger I opted out of SERPs it seemed like a good idea at the time as the implication was that the state pension would not exist by the time I retired. I thought having the money going to a separate pot would safe guard me to an extent against a future Government abolishing pensions. I hadn't taken on board the fact there were at the time two state pensions.


I now find out that opting out of SERPS means a reduction in the amount of the new state pension am likely to receive (assuming all things remain constant).


What I would like to know are the following:


1) How much reduction in SERPs per year opted out?


2) Can I make addition payments to cover this or are those just for completely missed years (e.g. mum at home with kids)


I thought initially when the new rules came in I would get the £148 (or equivalent rate at time) + NEST pension (contracted in by employer) plus the pension built up due to the opt out. I am thinking currently this won't be the case.


It was brought to my attention by an advert regarding SERPs miss selling. Now I am not saying I was mis-sold as at the time obviously the new pension rules were not applicable. Also unless they knew they were likely to give me less than SERPs based on SERPs rules at the time I cannot see how I would have been miss sold. (Not saying having the compensation either in cash or via a pension contribution would not handy) However it has prompted me to look at what I am likely to get whilst I still have time to rectify the issue. My biggest concern is that the opted out pension plus the reduced pension amount come to less than £148 per week. Obviously I want to take steps not to lose out on what I should be entitled to.

xylophone

You will get your Nest pension.

If you were contracted out, either you have an old deferred occupational pension somewhere ( a former employer?) or a pension policy (formerly protected rights) with an insurance company?

Contracting out for other than defined benefit schemes ended in 2012 and will end next year for defined benefit schemes.

After NSP starts, you will be able to ask for an NSP statement which will show you your Foundation Amount.

You will be able to add NI credits to that to build your pension up to full NSP.

See https://www.gov.uk/new-state-pension/overview

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

hyubh

datlex wrote: »

Back in 1997 when I was much younger I opted out of SERPs it seemed like a good idea at the time as the implication was that the state pension would not exist by the time I retired. I thought having the money going to a separate pot would safe guard me to an extent against a future Government abolishing pensions.

That was a confused rationale like you say, however in hindsight it was a 'good' decision' (see below).

I now find out that opting out of SERPS means a reduction in the amount of the new state pension am likely to receive (assuming all things remain constant).

This is a misunderstanding. If you actively opted out of SERPs, then that must have been in the context of a personal person, for which the possibility of opting out was a abolished a few years back. (Until the new system starts contracting out remains for occupational DB schemes, but in the DB case it's the scheme that chooses to be contracted out, not the individual.) As such, only for a period were you contracted out.

Were the new system not to be coming in place, the period you were contracted out would have reduced your additional state pension entitlement, not your basic state pension entitlement. The new system is combining the basic and additional state pension into one; since it would be unfair for those who had contracted out to suddenly get the additional state pension they had contracted out from, someone who retires having spent decades contracted out won't get the so-called (and rather misnamed) full 'flat' rate. However, they won't get less than what they would've have done either.

In your case however, you have many years to go to retirement. As such, you're in the lucky position of having a private pension earned from your time contracted out plus the ability to earn potentially a full additional state pension - the full 'flat rate' under the new system - as well. You're one of the winners in the new system in other words.

datlex

It was deferred into a pension policy with an insurance company. I know it ended in 2012, but it still means 15 years opted out. I don't know if the reduction in NSP will be covered by the amount I should reasonably expect to get.


Handy to know that I can make additional payments to get the full NSP, I didn't think it was clear that it was an option in my kind of case.


I realise I would get the NEST on top of pension derived from Nat Ins cont (state pension plus opted out pension).

xylophone

The policy with the insurance company is also a pension.

What benefits does it offer? Do you get a yearly statement?

dunstonh

I thought initially when the new rules came in I would get the £148 (or equivalent rate at time) + NEST pension (contracted in by employer) plus the pension built up due to the opt out. I am thinking currently this won't be the case.

That would be nice but not very logical. Although theoretically possible for some people.

It was brought to my attention by an advert regarding SERPs miss selling. Now I am not saying I was mis-sold as at the time obviously the new pension rules were not applicable.

Yes, its a bit difficult to complain that legislation changes some 20 years later made is mis-sold. It's also likely to be difficult as you are probably financially better off because you contracted out.

Also unless they knew they were likely to give me less than SERPs based on SERPs rules at the time I cannot see how I would have been miss sold.

it is generally considered cost/benefit neutral in terms of income. However, having a lump sum by contracting out to do with as you wish from age 55 compared to no lump sum from your state pension age is a major benefit from contracting out. As are the death benefits.

Not saying having the compensation either in cash or via a pension contribution would not handy

Have you noticed why there are not many adverts telling you to complain about it? That is because the FSA found a failure rate of just 1.5% when it reviewed contracting out. The SIB, as it was in 1996, did a review at that point and found that everyone who had contracted out to that point was financially better off.

I know it ended in 2012, but it still means 15 years opted out.

And how many years contracted in will you get (under old and new state pension)?

datlex

dunstonh wrote: »

Have you noticed why there are not many adverts telling you to complain about it? That is because the FSA found a failure rate of just 1.5% when it reviewed contracting out. The SIB, as it was in 1996, did a review at that point and found that everyone who had contracted out to that point was financially better off.

And how many years contracted in will you get (under old and new state pension)?

Only seen one advert, but think can be worth taking prompts to check things out (wouldn't go to any company for help)


Contracted out years = 15
Expected contracted in years= 28 ( think I need 35 to get full pension at current rules for new pension)

dunstonh

datlex wrote: »

Only seen one advert, but think can be worth taking prompts to check things out (wouldn't go to any company for help)


Contracted out years = 15
Expected contracted in years= 28 ( think I need 35 to get full pension at current rules for new pension)

So, you should do very well out of contracting out as you did.

jamesd

Ignore the advert about SERPS mis-selling. Because the flat rate pension system imposes a cap on how much it will pay, and you have many more years to pay in, you will get both the contracted out money and the maximum flat rate, while someone who didn't contract out will get only the maximum flat rate.

You were young enough when you contracted out to be in the prime age range when you did it.

The flat rate system calculates a "foundation amount" for each person based on the current rules and the new rules. For you the current rules calculation will be higher. That calculation in April 2016 will get you (years paying NI, contracted in or contracted out) / 30 x basic state pension (capped at 30 years) + your additional state pension from when you were contracted in. Then for years after the flat rate comes in your state pension will increase by 1/35th of the flat rate until you reach the full flat rate cap.

Say you're 42 now and have 15 contracted out years and 3 contracted in, plus two more years contracted in before April 2016 (this tax year and next). Your calculation would look like this:

(15 + 3 + 2) / 30 x £113.10 + maybe £9 additional state pension = £84.40

If the flat rate is £155 you would need to pay in for (155 - 84.40) / ( 155 / 35) = 15.9 years to get maximum flat rate pension. With 25 years to go that's easy enough so that's what you'll end up getting.

Thank whoever got you to opt out, they have significantly improved your likely financial position in retirement.

Revelstatt

Hi can anyone help with this before I contact my company and probably make myself sound silly . I started a personal pension with the pru in 1991 and pay £40 a month into it that was for the pension and 25 years life insurance , I was also told that I would be best to opt out of SERPS and as I was green under the gills I did as the seller said as it was gonna earn me much more . So my question is was I right to opt out or was I wrongfully advised ?.

bigfreddiel

Revelstatt wrote: »

Hi can anyone help with this before I contact my company and probably make myself sound silly . I started a personal pension with the pru in 1991 and pay £40 a month into it that was for the pension and 25 years life insurance , I was also told that I would be best to opt out of SERPS and as I was green under the gills I did as the seller said as it was gonna earn me much more . So my question is was I right to opt out or was I wrongfully advised ?.

I was advised in exactly the same way back in 1979ish.

It was only for a few years but I think it was bad advice, so much water under the bridge now so I can't actually prove it was bad.

Cheers fj