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

MoneyWorry

I am not sure what the original poster means by hidden agenda. If you look at my previous posts you will see that I am very much an ordinary working person who has spent some years contracted out, some years contracted in and some years with no employer contribution to my pension.

Under the old rules I have £120 so yes I will have to work some years to make up the full flat rate even though I already have enough qualifying years. Am I bitter about it? Not in the slightest. The state pension is only part of my retirement planning and I prefer to direct my energies to the other parts which are my responsibility.

green_man

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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.

This isn't really the case. It's true that many people have misunderstood what is happening to a large degree and the thing that seems to make no sense is:

A small period of contracting out (say 5 years) seems to all but cancel out the other 25-30 years that many people will have contributed whilst contracted in due to the assumptions made on GMP growth. People would normally expect that if they were 50% in and 50% out of serps that they should get 50% of the additional pension figure.

For people in a private pension the standard advice in the 80s/90s was to contact out until a certain age and then contact back in again, this seems to have been incorrect advise, it looks like people would have been better off either fully contracted in or fully contracted out.

agarnett

Sorry, MoneyWorry, that I dared use the phrase "hidden agenda".

I was just taken with your (in my view) very premature and pointed judgement which basically left no room for reasonable explanation of why people like me (another ordinary working person, except one who has the ability to interpret small-print far better than most) are criticising the the mess that has emerged from the introduction of the new flat rate (sic) state pension.

You will tell me if I am wrong, but I wonder if your view stems from having had several jobs in your career or just a few ? I am thinking just a few. And whether towards retirement your view stems from feeling job secure to state retirement age as opposed to the more common feeling of feeling job insecure towards retirement ? We are each to a large extent the product of our environmental pasts.

You seem to have grabbed for yourself some moral high ground (which you may well deserve) but I think you may inadvertently have been dismissive of a rather large group of your peers who have a valid beef against the new state scheme and how entitlement is calculated.

I think it might be helpful to question how the particular level of NI rebates was ever calculated in the first place, because you seem to be taking it as read that whatever those rebates were, they were correct for all time. I don't share that confidence, particularly in relation to the 1978 to 1988 contracted out private DB schemes.

I think like most people, the level of NI rebates that went into separate post 1987 SERPS DC policies is easier to follow, if not to validate and compare to reductions in new state pension. That's a more conspicuous thing to look at, and to ask OK how did those DC schemes do, and what level of pension per week are they on track to provide? Are they typically going to make up some difference ? That's fair as long as we can be confident that those schemes have all been performing ok and are still in place. But actually we can't be sure they are all in place, because successive governments have allowed the message that some of those standalone SERPs policies have turned out to be a very good deal such that they were termed as windfalls as early as 8 or 9 years ago.

Now the government is allowing the message that if you saw them as windfalls you were fools, and foolish behaviour should get what it deserves i.e. relative poverty in retirement.

But that's the DC side of SERPs, and with respect, I think it's the side of it that I think you are relying too heavily on to make your premature judgement. Until the Telegraph article was published yesterday, I don't think anyone had convincingly presented the much more surprising overspill consequences with regard to any even short period of being a contracted out private sector DB scheme member.

I am not sure you understand that part of the story which is the biggest part for me ...

Sure there has been a lot of repeated technical mumbo-jumbo that suggests rather too quickly that this is old news, but the real point is that many regurgitators understand the price of things but not the value, or should I say the real meaning.

Teresa Hunter has done us a real favour by illustrating how the mumbo jumbo pans out so that we may begin to actually interpret it in real life effects on the likes of you or me. Sure you may be less affected than me, but it doesn't entitle you to dismiss my judgement of entitlement nor to suggest I suffer from a disposition of greed. They are actually a nuanced paired insult, aren't they ?

In the 70s and 80s the private sector DB schemes were often non-contributory and were frequently touted as being as good as public sector schemes. It now seems that the government is undermining them. Many would say that Gordon Brown started the practice, although I was never quite sure if that really cost us dear directly, but was used as an excuse to wind up schemes prematurely.

Private sector DB schemes frequently had fixed percentage revaluations built in so that the employers could budget the cost more easily. It turns out that in recent years those fixed rate revaluations have caused surviving private sector DB schemes to be termed quite valuable to members, and expensive to sponsoring employers. I consider myself lucky to still have one, but I am not sure for how much longer I'd be right!

I am now getting the impression that the excess value remaining within contracted out private sector DB schemes has effectively been targeted for some kind of compulsory requisition by the government. They seem to be diverting value away from members into a second bite of cutting state pension costs for government (contracting out in the first place was a government cost cutting exercise. They seem to be conducting things as if they didn't cut enough costs originally by offering contracted out arrangements back then, that they must have rebated too much because private schemes seem to have done too well. So now government want a second dibs at the retirement end. Private sector DB schemes from the 70s and 80s seem to have been reduced to provision of a GMP core, which is not really what I expected, and now even that is under threat. The GMP element was only ever viewed as incidental whilst I was an active member. Now, twenty or thirty years on, it seems to be both the principal small mercy I shall get out of my private sector DB scheme , and the small mercy I am supposed to be eternally grateful for, yet even it is being systematically undermined by government.

jamesd

Terasa Hunter may have done you a real favour but this was discussed to death here when the plans were announced and her problems are with the old rules, not the new ones, except that the new rules seem to have set her expectations at 155 not what she'd really get under the old rules.

She is suffering because:

1. If contracted out into an employer scheme that is supposed to pay what the state pension would have paid and would often pay more. She speculates that hers won't, without apparently considering what the Pension Protection Fund will do if it fails to manage to meet its obligations. Since the usual PPF level is 90% of the pension entitlement she should end up with most of it.

2. She mentions some contracting out into a personal pension and says that £75,000 would be needed to fill the gap between her state pension entitlement and presumably the full flat rate since she's apparently disregarding the defined benefit pension entirely. She doesn't say how she comes to the £75,000 figure. Using state pension deferring it would provide far more than the amount required so she must be thinking of something much less efficient. Maybe an annuity purchase, which at a 3% RPI annuity rate means she's anticipating buying an annuity paying £2,250 a year, £43.27 a week. She wrote that her old rules calculation would be £124.31 a week and used a flat rate level of £155 so that's £30.69 to make up. To make that up with £75,000 means buying an income at a 2.13% rate. Here are today's single life RPI rates at various ages: 70: 4.109%%, 65: 3.251%, 60: 2.548%, 55: 2.139%. And that solves the mystery of the £75,000: she's using the age 55 RPI annuity rate. perhaps she's under some illusion that state pension ages are dropping, instead of increasing. If she was foolish enough to use an RPI annuity to buy the income the actual cost at age 65 with today's annuity rates would be £69,210. She wrote that she reaches a 66 years state pension age in 2021 when she'll have 47 years of contributions. So she's in the group of women who have the same state pension ages as men. That is about six years away so she'd need to pay £840 a month gross to get to the £69,210 requirement.

3. For some reason she's blaming the new system when the calculations in 2 are using the old system that is better for her. Her problem doesn't seem to be the flat rate system at all.

4. Between 2016 and her specified state pension age she'll have five working years available. That increases her flat rate state pension entitlement by 1/35th of it per year, so £4.42 a week using the £155 she used for the flat rate. The five years will get her another £22.10. That's probably more than the current rules would get her since she's already maxed out on basic state pension and would only get Additional State Pension increases under the old rules. That reduces the amount she needs to buy the income inefficiently with an annuity to 49% of the point 2 level. That'd take the monthly gross required to £411. But she can defer to get that extra income instead, gaining 5.8% a year on her state pension.

5. After working for the extra five years her state pension would be £146.41 a week, ignoring the remaining part of a year under old rules. That's £7,613.32 a year. Full flat rate at £155 a week is £8,060. 8060 / 7613.32 * 100 - 100 = 5.87% increase. So what does it really cost her in pot to get her income to the flat rate level? Roughly one year of deferring at 5.8%. Which costs here the almighty sum of £8,060 if we want to start her at the full flat rate. To get that takes £98 a month gross (using 4.5% plus inflation growth rate).

6. She asks: "It has been suggested I make some voluntary contributions. But after paying into the system for nearly 50 years, why on earth should I?" The answer is because her state pension entitlement under old or new rules is not enough to get to the full flat rate and if she wants that she has to pay for it like everyone else.

7. Somehow she's been paying in for nearly years without accumulating much state pension entitlement under the old rules. Yet the only cause she mentions for that is her starting being contracted out in the scheme that she says is unlikely to pay much. What happened to the rest of her working life? It appears that she's not bothering to mention other defined benefit pensions and asserts that the personal pensions wouldn't cover her grossly inflated £75,000 worth of gap.

So to summarise:

She's blaming the flat rate when her problem isn't the flat rate, it's the old rules.
She's ignoring her work pension income even though it's protected by the PPF, presumably.
She's ignoring her personal pension from contracting out, which is probably worth more than the £8,060 she needs to defer to get full flat rate.
She wasn't entitled to full flat rate anyway before it was introduced so her target is bogus.
She's probably going to be a winner under the flat rate, getting both her work pension and her personal pension pot in addition to an almost full flat rate.

Or even more succinctly: the flat rate bit is right but her sob story is not.

bilbo51

agarnett wrote: »

I am now getting the impression that the excess value remaining within contracted out private sector DB schemes has effectively been targeted for some kind of compulsory requisition by the government. They seem to be diverting value away from members into a second bite of cutting state pension costs for government (contracting out in the first place was a government cost cutting exercise.

The fact is that you will have paid lower NI contributions throughout your membership of your DB scheme as it will have been contracted out of SERPS/S2P.


In other words, you have not contributed to SERPS/S2P, so should expect no benefit from these schemes.


This situation prevails in the case of Ms Hunter.


I can't see what your beef is.

agarnett

bilbo51, it is more complicated than that, as I have tried to explain, and indeed as Teresa Hunter has also explained.

No-one has contributed to government SERPS or S2P. Like everything else to do with government budgeting for welfare, these things are unfunded in a kind of Ponzi arrangement, aren't they?

The fact is that NI (there's a misnomer if ever the was one - it is just an income tax) was reduced by some nominal percentage for employees who were diverted into contracted out arrangements and for their employers who did the diverting.

One might assume that there was government cost saving as a motive. Fair enough. So far so good - at the time.

Fast forward 35 years and then the government starts working on a project to save even more money which we have just discovered is not just the original cost saving of having contracted a whole bunch of us out of SERPS / S2P, but now also involves undermining those private sector contracted out arrangements in ways that go far beyond the original intention of just swapping one qualifying year contracted in with one qualifying year contracted out. Oh no, the government wants the entire GMP related revalued bit in private schemes to prop up the state pension, even though it abdicated the responsibility for getting an adequate growth out of limited funding for it into private hands as a contracted out (or outsourced if you like) arrangement.

We know that contracted out arrangements have now been knocked on the head so full rate NI contributions are back for everyone, but the government has also now abdicated responsibility for revaluing the private sector scheme GMPs in retirement. In retirement no-one pays NI, yet contracted in state pensioners will get their entire state pension revalued annually and so will contracted out public sector DB scheme pensioners, but as private sector contracted out DB scheme pensioners it looks like we will not, and it looks like the calculations involved are stinging us further in very disproportionate ways. So much so that we would have been better off not being in a private sector DB scheme or even have paid any NI at all than have been in one for just a few years and paid NI at the modestly reduced rate. So this is a discrimination against a particular group of us and it looks like it will be a group of some millions over the next few years.

You may not understand my beef, and for all we know, you may not be affected and have no motive to try to understand it, but beef it is, nevertheless, and pretty well exposed by Teresa Hunter.

agarnett

jamesd wrote: »

She's blaming the flat rate when her problem isn't the flat rate, it's the old rules.
She's ignoring her work pension income even though it's protected by the PPF, presumably.
She's ignoring her personal pension from contracting out, which is probably worth more than the £8,060 she needs to defer to get full flat rate.
She wasn't entitled to full flat rate anyway before it was introduced so her target is bogus.
She's probably going to be a winner under the flat rate, getting both her work pension and her personal pension pot in addition to an almost full flat rate.

Or even more succinctly: the flat rate bit is right but her sob story is not.

I have to take this especially onboard, jamesd, as it's you that's asserting it, but it does seem a rather unusually irritable take on what she has said, and it doesn't sit well with what I think I am beginning to see with my own arrangements.

The one part of your argument (and that of many others) that I think is bogus about the fate of my private sector cohort is the suggestion we still have a few years to make up the difference between the basic old rules minimum, plus any contracted out benefit, and the new so called flat rate. Our ability to realistically qualify for further years is in practice curtailed. You yourself achieved financial independence very early. You are not typical of the cohort. More typical of the private sector employed among us is that we found ourselves eased out of the intended workplace (sometimes several times) long before we reached financial independence.

Why do we as private sector workers have to consider working to age 66 or beyond in a currently worsening ageist environment when generally speaking (and I appreciate not all have not been so lucky) contracted out public sector workers have had a better chance of surviving in their jobs until retirement, then retire at 60 and have little worry about the vagaries of the new state system, or about revaluations of GMP in retirement. And moreover, many private sector workers have to take reductions in our private DB scheme pensions if we wish to take retirement at age 60.

There are several strands of imbalance in all of this, and flat rate (that's the one where everybody gets different amounts) is indeed the upshot. The claimed rebalancing behind the scenes just does not add up for me, and it did not add up for Teresa Hunter although I am sure she appreciates your attempts at working it out for her!

okydoky

Totally understand your "beef", agarnett, think I am very much in the same boat along with millions of others.


Do you know what it might have "cost" you? I think the Hunter story reads well since it has some specifics within it.


Here is my potted story - in private sector from 1973 to 2012 when I took VR package. Have not worked since, with little or no prospects of work. Now aged 59(shortly) with 41 qualifying years, my state pension forecast in 2014 was £110.15pw basic SP with ASP of £72.20, subject to the caveat that this could be lower if I was ever contracted out, especially between 1978 and 1997. Well I was in fact contracted out from 1993 to 2005 so there is a 4 year overlap so presumably, per the Hunter story, I can expect a significant reduction to my ASP for this period? I currently await a SP forecast with bated breath, I am due to get the SP in June 2022.


I am happy to share the info once I get it.


What do you think is the worst case scenario?

xylophone

in private sector from 1973 to 2012

with ASP of £72.20, subject to the caveat that this could be lower if I was ever contracted out, especially between 1978 and 1997. Well I was in fact contracted out from 1993 to 2005 so there is a 4 year overlap so presumably, per the Hunter story, I can expect a significant reduction to my ASP for this period?

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

As you are likely to have some graduated pension for 1973-1975 and SERPS from 1978 to 1993 and S2P from 2005- 2012 ( and possibly even before, depending on how much you were paid) I would imagine that the ASP figure of £72.20 may be fairly accurate, having taken account of your contracted out years?

Remember that a person who had never been contracted out and became eligible for his state pension this year could be receiving over £160 a week in ASP.

You may be one of those people whose "foundation amount" is greater than the full level of the new state pension?


P16

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181229/single-tier-pension.pdf

greenglide

And, of course, it is not a "Flat Rate" although politicians were stupid enough to bandy the term about (they obviously didnt know what it meant) but early on the official name became "Single Tier" (now officially new State Pension - nSP).

Single Tier was correct as it was never meant that everybody got the same. Removal of the multi tier system (basic + GRAD / SERPS / S2P, Class B, AB, D etc) gives the same value for each year of contributions which isnt "Flat Rate".

Any transitional measures were bound to upset some groups. Some groups such as those with an SPa date just after 6/4/2016 who have 9 years contributions will get nothing as the minimum 10 years contributions (the Minimum Qualifying Period) applies to everyone from 6/4/2016 have every justification to be right royally peed off!