New State Pension starting amount and full record of qualifying years- trial service

bigfreddiel

"Your statement will be calculated according to new State Pension rules."

That statement sounds a bit interesting. Are they not going to use the old rules as well and use the higher of the two figures?

Cheers fj

SnowMan

bigfreddiel wrote: »

"Your statement will be calculated according to new State Pension rules."

That statement sounds a bit interesting. Are they not going to use the old rules as well and use the higher of the two figures?

Cheers fj

They will do both calculations, but just show the higher figure.

Paper statements for those aged between age 50 and age 55 until now, have shown just the old rules calculations, even though the better of old and new will eventually apply.

So this wording is just to say the statements/calculations, for those over 50, will now allow for the new rules calculation as well.

coastline

SnowMan wrote: »

So your starting amount is based on the higher old rules calculation of £119.30pw.

As you already have the maximum required under the old rules calculation (30 years) then paying voluntary contributions to buy pre April 2016 years won't increase your starting amount.

So in summary there is no benefit to paying voluntary contributions for missing pre April 2016 Qualifying Years, as your starting amount at April 2016 will still remain at £119.30pw.

However you can pay voluntary contributions for post April 2016 Qualifying Years to increase your starting amount up towards £155.65pw. You will earn 1/35th of the new state pension for each post April 2016 Qualifying Year, about £4.45pw (=155.65 x 1/35). So you will need 9 post April 2016 Qualifying Years to get you up to £155.65pw, after which you can't earn any additional state pension (as 7 x 4.45 + 119.30 = 159.35 which is just greater than 155.65)

It will depend on how near you are to SPA whether you have enough potential post April 2016 years to get to £155.65pw.

All these figures are in 2016/2017 terms, so the starting amount and £4.45 increments will all increase up to SPA, currently in line with the triple lock (higher of earnings inflation, CPI price inflation and 2.5%). So 9 post April 2016 years will get you to the full single tier pension amount.

Thanks for your reply and clearing up the situation regarding the gaps in NI pre April 2016.
I was guessing I could pay the reduced rate for NI of £689 as shown below.

Cost of buying additional NI contributions.

NI YEAR COST TO BUY NOW
2011/12 or before £689
2013/14 £705
2014/15 £723
2015/16 £733

SnowMan

coastline wrote: »

Thanks for your reply and clearing up the situation regarding the gaps in NI pre April 2016.
I was guessing I could pay the reduced rate for NI of £689 as shown below.

Cost of buying additional NI contributions.

NI YEAR COST TO BUY NOW
2011/12 or before £689
2013/14 £705
2014/15 £723
2015/16 £733

Based on you already having more than 30 Qualifying Years, then unfortunately paying the £689 will be wasted money as you can't increase your starting amount at April 2016, by purchasing this pre April 2016 year for the reasons mentioned in my previous post.

Starting amount before purchase (see earlier post) £119.30

Starting amount after purchase of 2011/2012 year
Higher of

OLD BASIS
= 30/30 x 119.30 + additional state pension
= 119.30 + 0
= £119.30pw

NEW BASIS
= 34/35 x 155.65 - 59.17 (COPE)
= 146.78 - 59.17
= £92.03pw

Starting amount (after purchase) still £119.30pw

Extra pension by buying 2011/2012: £119.30 - £119.30 = nil

gee9fam

SnowMan wrote: »

Whether transferring the existing Aviva fund to a SIPP is a good idea, will depend on the size of the MVA, when the MVA ceases to apply, and a comparison of charges and investment options etc.

Snowman, thanks for your reply.

I'm still a little confused by the MVA. There isn't one currently but it states in the small print that if there are problems in the future it could be invoked and the final bonus may be reduced. Would this not mean to remove any possibility of an MVA being invoked against the final bonus it would be safer to move it so there is just one lump sum amount. I may misunderstand and there is a means to charge an MVA against both the lump sum and final bonus.

SnowMan

gee9fam wrote: »

Snowman, thanks for your reply.

I'm still a little confused by the MVA. There isn't one currently but it states in the small print that if there are problems in the future it could be invoked and the final bonus may be reduced. Would this not mean to remove any possibility of an MVA being invoked against the final bonus it would be safer to move it so there is just one lump sum amount. I may misunderstand and there is a means to charge an MVA against both the lump sum and final bonus.

That's impossible for me to answer specifically because different companies apply bonuses and MVAs in different ways and in different circumstances and even different funds with the same company may have an MVA applied differently.

However talking more generally about MVAs:

Often there are points such as the age the policy was set up to and certain policy anniversaries where an MVA won't apply.

If a policy is transferred away other than at these points where no MVA is applied, then the company may or may not apply an MVA.

The MVA is simply a reduction (e.g. 10%) of the amount available to transfer (including bonuses). An MVA will normally be applied in circumstances where the underlying investments are worth less than the transfer value available (before MVA).

The fact that no MVA is being applied at a particular time on transfers (where it could be applied) is an indication that the underlying investments aren't too far in value from the transfer value being offered.

Let's assume a significant amount of the with profit fund is invested in equities. Let's suppose there is a major sudden market crash. The insurer may then start to apply MVAs, but if you wait until a point at which no MVA applies you may get a payout which is more than your share of the underlying assets because of the smoothing policy of the insurer. The payout might be slightly less than had the market fall not occurred (because of a reduction in final bonus) but you may have been insulated from the full fall in markets.

Let's assume now that you transfer before the market fall, incur no MVA, and just happen to invest your pension in a unit linked fund in the same underlying investments with the new provider as the with profits funds were invested in. Your funds will then suffer the full market fall and if you then access your pension at the age when no MVA would have applied with the original provider, you should end up with a lower payout than the original insurer would have given you.

In that hypothetical example it would not have been a good idea to transfer away just because there was no MVA being applied at the time.

If you knew that an insurer was imminently about to apply an MVA then that could form part of some reasoning to transfer, but insurers don't tend to wave a flag to tell you that is about to happen.

jingleberry

Very interesting thread. I’m 58 and due to claim state pension at 66. I took early retirement from my career in 2008 and my earnings now are below the threshold for paying national insurance. I have a state pension forecast from this new site which shows I accumulated 35 full years of NI contributions before I retired, so I am entitled to the full new state pension, less the contracted out deduction. In my case the deduction reduces my new state pension to just above the 'old' state pension i.e. £115 pw. For reasons not entirely clear to me, the forecast shows that if I continue to contribute to NI until age 66 I could increase my state pension to £155pw. I doubt if I will be earning enough to pay NI in the future so my question is this: Is there any benefit to me in making voluntary NI contributions. I appreciate that I already have the full 35 years, but I’m wondering if making these contributions would affect the contracted out deduction calculation being applied to my new state pension, since I will be increasing the total contribution years and so diluting the fraction of years I was contracted out. Hope this makes sense. Thanks in advance for your help

SnowMan

jingleberry wrote: »

Very interesting thread. I’m 58 and due to claim state pension at 66. I took early retirement from my career in 2008 and my earnings now are below the threshold for paying national insurance. I have a state pension forecast from this new site which shows I accumulated 35 full years of NI contributions before I retired, so I am entitled to the full new state pension, less the contracted out deduction. In my case the deduction reduces my new state pension to just above the 'old' state pension i.e. £115 pw. For reasons not entirely clear to me, the forecast shows that if I continue to contribute to NI until age 66 I could increase my state pension to £155pw. I doubt if I will be earning enough to pay NI in the future so my question is this: Is there any benefit to me in making voluntary NI contributions. I appreciate that I already have the full 35 years, but I’m wondering if making these contributions would affect the contracted out deduction calculation being applied to my new state pension, since I will be increasing the total contribution years and so diluting the fraction of years I was contracted out. Hope this makes sense. Thanks in advance for your help

If you've got 35 Qualifying Years to date with a significant amount of contracting-out then it sounds reasonable that your starting amount at April will be based on the old rules calculation, because the contracted-out deduction on the new basis will take that calculation down below the old calculation. Although the new rules calculation could be slightly higher once they've crunched the numbers. They give you the higher figure as your starting point. So your starting amount should be at last £119.30pw (the basic state pension amount) in 2016/2017 terms.

If you already have 35 Qualifying Years you can't add to your starting amount by purchasing missing pre April 2016 years.

But you can pay class 3 voluntary contributions going forward to buy post April 2016 Qualifying Years (if your earnings aren't enough to give you a Qualifying Year otherwise and you don't qualify for credits)

If you've got (say) 7 complete tax years between 6th April 2016 and your State Pension Age then you can earn 1/35th of the state pension, about £4.45pw (= 155.65/35) in 2016/2017 terms for each of those post April 2016 Qualifying Years so that could add about £31.15pw (= 7 x 4.45) to your starting amount.

All the complication of contracting-out disappears into the starting amount they calculate at April 2016. And its just a simple case you add to that starting amount post April 2016 as per the previous paragraph.

So if your starting amount was around £124pw (you don't state the exact figure) then those 7 potential years could get you up to around the full single tier pension amount of £155.65pw (as £124 + £31 = £155).

Class 3 contributions to buy these post April 2016 years are currently £14.10pw for 2016/2017 (£733.20 for the full year) so represent great value relative to the before tax pension you are buying of around £230pa (= 4.45 x52). So unless you have a reduced life expectancy or you may qualify for means tested benefits such as pension credit in retirement, then it is worth paying.

gadgetmind

jingleberry wrote: »

my earnings now are below the threshold for paying national insurance

But are they below the threshold for earning a qualifying year, which is less? This is the "LEL" and is currently £112 per week.

For reasons not entirely clear to me, the forecast shows that if I continue to contribute to NI until age 66 I could increase my state pension to £155pw.

Under the new system, any additional years will now earn £155/35pw on top of what you have now. (Subject to £155 as the max.)

Is there any benefit to me in making voluntary NI contributions. I appreciate that I already have the full 35 years, but I’m wondering if making these contributions would affect the contracted out deduction calculation being applied to my new state pension

No, all the mumbo jumbo to date is now turned into a single number, which is what pension you have earned so far. This is your "foundation amount" and additional years (earned or bought) add to this as above.

jingleberry

Gadgetmind and snowman, I cannot thank you enough for taking the time to respond to my query. Just to be clear, the headline figure from my forecast, which assumes NI contributions are added to my record until I reach the maximum, is £152.59 pw. The amount based on my current NI record (it actually includes 36 full years contributions) is £119.69 pw. Starting from 6 April 2016 there are 7 full tax years until I reach state pension age at the end of April 2023. If I understand you correctly, I have the option of making class 3 voluntary contributions (currently £14.10pw or £733.20 pa) for each of the next 7 years. Each years contributions will yield an additional £4.45pw/ £231.40 pa pension (the contribution rate and the 'yield' will both go up with inflation in future years) so as you say this is very good value - each years class 3 contributions pay for themselves in extra pension after just over 3 years. Have I understood you correctly? If so making these contributions seems like a no-brainer. One risk is that there is a change in government policy in the future meaning any contributions I make are wasted. To avoid this I would like to delay making all contributions until just before I reach state pension age in 2023, then make all seven years retrospectively. Does this sound sensible, or even possible?
Gadgetmind thanks for the heads up about the LEL. I actually get paid monthly so I assume I would need to earn in excess of £485pm (£112 x52/12) to earn a qualifying year and so far I have never reached these dizzy heights.