The Real Truth of new 'flat rate' pension (where everybody gets different amounts)

agarnett

Well done to Teresa Hunter writing (today?) in the Telegraph for exposing the real truth about this fiasco:

See http://www.telegraph.co.uk/finance/personalfinance/pensions/11608210/The-new-flat-rate-pension-where-everybody-gets-different-amounts.html

greenglide

Old news.

The press, of all people, should certainly not be complaining about this as they were the main people who failed to understand and spread this when it was "news".

No surprise at all.

agarnett

Have you not read this one, greenglide?

It seems to have a new angle that I have not read anything about here on MSE at least.

Did you not see the part that describes how being contracted out for even a short period in your history could have a disproportionate adverse effect on our new state pension entitlements after April 2016, in part due to some "arcane" calculation based upon assumption of career patterns which have simply proved false and of no relevance for decades?

I have been contracted in as much as contracted out, yet my 35 years plus of contributions only gives me £64pw under the new rules calculation. How on earth has that arisen ? It is a nonsense figure. Consequently like millions of others due to retire in the next few years I am capped at the current basic State Pension with no sniff of the flat rate promoted personally by posh boy Cameron himself as the best thing since sliced bread (which he probably doesn't know the price of anyway!). My standalone SERPs policy is worth about £50K so that will make up some of the gap, because luckily I hadn't inadvertently cashed it in and spent it some years ago like some will have done, completely blind to what was going to happen later.

But the most difficult to understand is my pre-88 final salary pension GMP mess. That arrangement was not set up as a SERPs arrangement, it was set up as a contracted out final salary arrangement that had a (always discussed as relatively modest or even incidental) element of SERPs within it. Now it seems that at least three things have happened as a result of that one being contracted out:

1. The government have pulled the plug on revaluing the GMP portion in retirement within private DB schemes.
2. As a direct consequence, the scheme seem to have reduced the CETV to reflect the fact that the GMP is now worth much less because no-one in private sector land will be honoring GMP revaluations in retirement if the government aren't paying, now will they?
3. Some unknown formula is being applied to those 10 years of service spent in the pre-88 contracted out DB scheme which has a disproportionate reducing effect spilling over into all the qualifying contracted-in years I have got.

MoneyWorry

This is very old news. She has not exposed anything. And as the experts on here have posted thousands of times, your calculated Foundation figure will be the higher of the old system and the new system.

What is happening is that people who were contracted out want to keep the NI rebate given them and be given the full flat rate as well. Not sure if this due to a misjudged sense of entitlement or plain old fashioned greed.

agarnett

What is happening is that people who were contracted out want to keep the NI rebate given them and be given the full flat rate as well. Not sure if this due to a misjudged sense of entitlement or plain old fashioned greed.

What is your qualification to make such a dismissive judgement, please? (Just so we know who has rushed to the site of today's wound to the government's pension reform plans!)

To label the millions who are due to reach state pension age in the next few years after April 2016, as labouring under a misjudged sense of entitlement or plain old fashioned greed is a bit rich, especially if it comes from someone with a hidden agenda. Does it?

PS News for you perhaps - No expert has yet emerged on this subject to the point of successfully explaining it in rational terms.

peterg1965

I say hats off to George Osborne, steve Webb, Vince Cable and presumably Danny Alexander for coming up with the flat rate state pension. This is a genuinely long term decision that had to be made for the good of this Country and the sustainability of our long term finances. Yes, in the transition period (10 years or so) there will winners and losers but I suspect that's a small price worth paying. I have been contracted out for the whole of my career thus far, in fact I have just paid my first ever NI A contributions in my new job, so I may be one of the ones who has to ensure that I work until I have enough contributions to get the full flat rate.

I, like many others who have been contracted out, do not exactly dip out, we will have other pension arrangements which should/could go towards making up any deficit.

agarnett

OK Jack, I mean Pete, so you're alright

hyubh

agarnett wrote: »

Well done to Teresa Hunter writing (today?) in the Telegraph for exposing the real truth about this fiasco:

See http://www.telegraph.co.uk/finance/personalfinance/pensions/11608210/The-new-flat-rate-pension-where-everybody-gets-different-amounts.html

Having read the article, presumably the case study concerns someone benefiting from fixed rate GMP revaluation having inflated the GMP in deferment, though I wish the article had made that clear. If so, the crux is the final sentence of this paragraph (my emphasis):

It doesn’t help that DWP keeps telling me that my employer will make up the £48.95 weekly: there is no employer, so they won’t. My first year contracted out was with a company that disappeared decades ago. The scheme still exists, but the size of the deficit is such that I have very little expectation of ever receiving the pittance I might be due.

The preceding rant ('more horrifyingly...') is really beside the point.

taktikback

I think Agarnet has a point here. I haven't seen anything from the regulars on here that explained the disproportionate effect of notional GMP deductions on later contracted in contributions. I had assumed a constant yearly value for in and out years...

I will probably have 16 years or so contracted out followed by 14 contracted in by 2016. I had assumed that under the old rules I would qualify for the basic current payment of £115 plus the 14 recent years which would probably got me to the £155 near enough. Sounds like the revaluation of the 16 years out (because it came before the 14 years in..) is going to kill my calculation!...

coyrls

Does this notional GMP deduction that is applied across years where you may have been contracted back in, only apply to those who were contracted out into final salary schemes? My understanding is that there was no GMP for those (like myself) who were contracted out into defined contribution (occupational or personal) schemes.

hugheskevi

In case it is helpful, here is a simple example to show how the effect takes place. The formula to remember is:

Net Additional Pension = Gross Additional Pension - Guaranteed Minimum Pension

Gross Additional Pension is the amount of Additional Pension (SERPS plus State Second Pension) which would have been accrued had the member been contracted-in. The Guaranteed Minimum Pension (GMP) is the proportion of the contracted-out pension which is a consequence of being contracted-out.

When a member left the contracted-out pension scheme, their GMP was revalued is one of three ways. Two common methods were linked to earnings (public sector schemes usually used this method) or fixed rate revaluation. The table on this linked page shows the fixed rate revaluation which applies, as it varies depending on when the member left service.

Gross Additional Pension is revalued in line with earnings. Therefore, if the fixed rate revaluation is higher than earnings, this results in a negative figure for net Additional Pension.

If the result is negative, it simply results in a nil award in calculating State Pension at retirement (ie it doesn't reduce the Basic State Pension). However, if in future the member earns more Additional Pension (as they would if they have contracted-in service) this next period of contracted-in employment increases Gross Additional Pension, but it is not until the formula "Gross Additional Penson - GMP" becomes positive that the member actually accrues a positive amount of net Additional Pension.

That is how a previous period of contracted-out service can reduce the amount of Additional Pension accrued from a separate period of contracted-in service.

edit - later addition

Continuing the above, once State Pension commences, the calculation of net Additional Pension is the same (under the pre 2016 system). However, Gross Additional Pension now increases by prices (currently CPI). Meanwhile the GMP deduction increases at different rates.

The GMP deduction relating to pre 1988 service does not increase. GMP relating to 1988-97 accruals increases by the difference between prices and 3% (ie if change in prices is less than 3% it does not increase, if change in prices is 4% it increases by 1%). It is in this way that increases on GMP elements of private pensions are paid for through the State Pension, as Gross Additional Pension increases more rapidly than the GMP deduction. This can lead, for example, to a member having a negative net Additional Pension when they reach State Pension age, but then getting a positive value many years into retirement and starting to receive Additional Pension.

When the new State Pension starts in 2016 calculations will be performed based on the position as at April 2016, and the amount of net Additional Pension at that point will be used to calculate the Foundation Amount for the new single-tier pension. This means that the mechanism by which the State made GMP increases is stopped. For those reaching State Pension age shortly after April 2016 that means a loss of the increases.