New State pension

ajbell

Picked up a paper today and saw that it suggested that i would not get the full new state pension if i have paid into a defined benefit pension.


I am 50 and have worked continually since 16.
I have been fortunate enough to have been in 2 defined benefit pensions. The only time i have not been paying into one is between 2001 and 2005 when presumably i was contracted back in?. So where does this leave me with the state pension?.

jamesd

It leaves you exactly where you were before at the moment.

Under the old/current rules the state pension is made up of two parts, the basic state pension and the additional state pension. You always get a year of basic state pension entitlement until you reach 30 years. The additional state pension part is income-related and continues to accrue for all years while working, no 30 year cap. Being in a contracted out defined benefit pension will prevent adding more additional state pension while contracted out and will generally gradually reduce any accrued additional state pension from contracted in years. So a person with lots of contracted out working will have just the basic state pension part from the state, with the additional state pension portion coming instead from part of the defined benefit pension.

Under the flat rate rules the reduction for being contracted out is likely to be larger and the reduction is not blocked from affecting the basic state pension bit, so can reduce the state pension by more than under current rules.

However, all this means in practice is that you won't be any worse off under the flt rate scheme for the years worked so far. This is because contracting out for defined benefit schemes is being abolished, preventing future deductions from that after flat rate comes in, and because every person gets a Foundation Amount calculation at the start of the flat rate system that is the higher of their current rules or new rules amount. For a person who was contracted out a lot like you, it will be the current rules calculation that is used.

So you'll start out under the flat rate system with exactly the same entitlement as you would have under today's rules. For future years your state pension will increase by 1/35th of the flat rate until you reach the flat rate cap, after which it won't increase any more. Given your age you should have no problem getting to this level.

The flat rate cap is far below the current rules cap, which is around £250 a week. Because much of your "state" pension is going to come from the earnings-related additional part via your defined benefit pension you're actually likely to be better off than a person who wasn't contracted out. You'll get the flat rate cap plus that from the defined benefit pension, a person with no define benefit part would just get the flat rate cap level.

Overall, though, you're likely to be one of the big losers from the flat rate system, just like everyone else with a full working history. Not because of being contracted out but because the flat rate system takes pension money that under the current system goes to the workers, by eliminating the earnings-related part, and gives it instead to non-workers via a higher core pension level. What you're going to lose is the difference between what you would have got from earnings-related increases for the rest of your working life and the higher core state pension level. Even a person on a low wage is going to be worse off if they have a full working life.

jem16

ajbell wrote: »

So where does this leave me with the state pension?.

Likely to get no less than you would if you were retiring on the current rules. So what were you expecting?

ajbell

I think i was expecting the £155 flat rate that has been suggested.
So it looks like i won't get this but nearer the current rate of £115.
Is this right?.


Luckily the state pension does not form a large part of my retirement plan.

jamesd

You'll almost certainly get the full £155 flat rate.

Come April 2016 you'll probably already have accrued the full current basic state pension under current rules and each year worked after that will increase your entitlement by 1/35th of the flat rate until you get to its full £155 cap level. That will take you nine more years of either working or buying years.

bigadaj

ajbell wrote: »

I think i was expecting the £155 flat rate that has been suggested.
So it looks like i won't get this but nearer the current rate of £115.
Is this right?.


Luckily the state pension does not form a large part of my retirement plan.

You'll get the higher of the pension accumulated under either the new or the old system.

The pension under the old system is set, and whilst you continue to work and pay national insurance then you will accrue more pension, when this figure exceeds that under the old system you will get more than you would have previously, though not necessarily the full 'flat rate' maximum.

The sums contracted out have effectively bought pension elsewhere so in all likelihood you will be better off than someone who has it been contracted out, and almost certainly no worse.

ajbell

Thanks guys, great replies, its a lot clearer now.

dunstonh

A certainly Daily Mail ran an article and judging by the comments, most in there didnt understand contracting out with an occupational defined benefit scheme and wrote a load of rubbish.

rammy007

I am of a similar age to OP and have just received a state pension forecast it says I have got 33 qualifying years and pension is £129.56 so will this be my foundation amount?

p00hsticks

rammy007 wrote: »

I am of a similar age to OP and have just received a state pension forecast it says I have got 33 qualifying years and pension is £129.56 so will this be my foundation amount?

Yes, I believe it will.

rammy007

That's not too bad then especially as there will be another year added 2015/2016 .i have been contracted out for the whole of my working life as still in the same job and pension scheme albeit closed now to new members