What COPE means to me

xxkk

A previous post talked about whether contracting out of personal pensions would be a new mis-selling scandal.
The idea was pooh poohed and I accepted from the experts that the contracting out of SERPs was a benefit.

However after getting a state pension forecast, I am wondering if this is the case after doing some calculations myself.
I started a personal pension about 1987, and encouraged by Thatcher's bribes, contracted out. I contracted out for about 20 years. The "advice" appearing on my pension statements was that it was worthwhile contracting out during 30's and 40's and then contracting in during 50's and 60's.

I have 35 years NI contributions so will get the basic pension. I also have 2nd pension amount above this. This amount is reduced by COPE and the final (basic + 2nd pension) amount is forecast to be about £ 160 a week - a tad over the flat rate amount. The cope is £55 week.

So the question is whether the "protected" amount of pension pot accumulated using the contracted out contributions will provide an equivalent of the COPE reduction.

In 2012 the protected pension amount was worth £57k. (I transferred to another scheme in 2012)

Adjusting for inflation, this is worth £62,663 in todays terms

My state retirement is in 2023, so the amount is expected to be £82,219 in 2023 in todays terms.
This is assuming that the growth from 2012 to 2023 is 2.5% above inflation.

When I get to state retirement I would need to buy an annuity to match the state pension.
I have assumed an annuity of 3% uplift, 50% spouse at an age of 66.
I estimate this to be about £2,824 pa per £100,000 pension pot, based on annuity rates today.

So my annuity will be £2,321 pa or £44 per week.

Please correct my figures and assumptions, but I think I have been short-changed.
I accept that I took on the risk in the first place, but I object to being told that I did well out of being
contracted out.

I would be interested to see similar calculations for others that took a personal pension and contracted out.

AnotherJoe

Suppose you did drawdown at 4% ? (Which is often stated as a "safe" withdrawal rate that will not eat into the capital)

£82,219 comes to £63/ week. Plus that is 100% spouse pension not 50%, and the capital is retained.

Or, do the sums the other way, drawdown £55 a week (your COPE amount) and it's even safer, and still gives 100% pension to surviving spouse rather than 50%, plus capital retained.

Or drawdown £75 a week and live a little and you'll probably run out when you are gaga and won't be able to spend it anyway.

Misspelling not such a slam dunk I suggest

xxkk

Yes, but i am doing like for like comparison. Drawdown has more risks than an annuity.

coyrls

Well you've made assumptions about investment performance and annuity rates in 7 years' time and that inflation in 7 years' time will be 3% (to match your state pension increases). That's a lot of assumptions. You may win, you may lose, as you say you took the risk. People who can earn additional years for the NSP, who have been contracted out into DB pensions are the winners. This doesn't apply to you, so I'm not sure who is telling you that you did well out of contracting out.

As it happens I am in the same boat as you but haven't done the calculations. I suspect I too have lost out but I can live with it. A final point is that you have other options for your £82,000 odd pounds (not least the ability to take a 25% tax free PCLS) than to take out an annuity.

woolly_wombat

xxkk wrote: »

I started a personal pension about 1987, and encouraged by Thatcher's bribes, contracted out. I contracted out for about 20 years. The "advice" appearing on my pension statements was that it was worthwhile contracting out during 30's and 40's and then contracting in during 50's and 60's.

Bad luck.

Hope you didn't do as badly as my OH - he chose Equitable Life with-profits for his opt-out bribe!

AnotherJoe

xxkk wrote: »

Yes, but i am doing like for like comparison. Drawdown has more risks than an annuity.

Well that's your choice. You now have choices, something you wouldn't have had had you not opted out. I also suspect (you'd have to look at Firecalc to check) that no stock market performance since records began would leave you in a worse position if you took the COPE amount as drawdown. Or very few anyway.

However, If you were so risk averse (no criticism intended) as it appears then opting out wasn't for you, so why did you? .Or perhaps your younger self was more of a risk taken than you are now, so you should blame him and not the advisers.

I think you are asking for a one way bet. Had opting out proven to be absolutely better under all circumstances would you be looking for those who didn't opt out to be compensated ?

Anything involving shares and investments is always a risk, expecting certainty is simply unrealistic.

dunstonh

A previous post talked about whether contracting out of personal pensions would be a new mis-selling scandal.

A daft thing to say really as the FSA did a review a few years back and found contracting out had a possible mis-sale rate of just 1.5%.

The idea was pooh poohed and I accepted from the experts that the contracting out of SERPs was a benefit.

Over the years it has gone from being a very good thing to do, to something that was not so good, to something that was cost neutral to something that was good again.

I started a personal pension about 1987, and encouraged by Thatcher's bribes, contracted out. I contracted out for about 20 years. The "advice" appearing on my pension statements was that it was worthwhile contracting out during 30's and 40's and then contracting in during 50's and 60's.

It wasnt advice. It was information and that information is correct. The age to contract in varied over the years as the rebates changed every year. Plus, product provider charges varied and could influence the age to get back in.

Please correct my figures and assumptions, but I think I have been short-changed.

Your assumptions seem to be too low and that is creating an artificially lower outcome. I get the figures coming out around £55 a week using reasonable assumptions.

That assumes you do not die (as contracted out is better than contracted in) and you do not take a lump sum (which you cant do with contracted in) and you take no death benefits to pay children (as you cant with contracted in).

AnotherJoe

Ps the opted out pension performance you are using as a benchmark is also the result of your choices of company and funds. Is that a miss sell as well? Do you want to double guess all financial decisions you've ever made and benchmark them against what "coulda shoulda woulda" have happened and blame someone ?

Who didn't advise you to buy shares in Apple and Google for example? Definitely a case for compo there surely?

I personally am considering lodging a claim against my considerably younger self for not buying Apple in 1998. What an idiot.

xxkk

AnotherJoe :

I accepted the risks and know the risks. I suppose I am looking for a figure of "what a COPE of £55 pw is worth in real money". My younger self was not clued up with regard to pensions. He would have done things rather differently, i suppose if he had my present experience and took more trouble, but there was no tinternet back then and the investment products and options were maybe more limited.

DunstonH:
Its reassuring that I haven't been done in my case. However if the figures are coming out about the same, would you agree that the option with less risk would be to not contract out.
That said, i think my original thinking was that the money is better under my control than the governments.

xxkk

"what a COPE of £55 pw is worth in real money".

I've got the answer:-
Pension forecast 160 per week.
Cope 55 per week
Total 215 p week. 11,180 p a

Delay SP for 1 year increases it by 5.8% = 482 p annum

It would take (55x52)/482 years to get the cope amount.
=5.933 years

Cost to provide pension for this time is 11,180 x 5.933 =66,330

AnotherJoe

xxkk wrote: »

Its reassuring that I haven't been done in my case. However if the figures are coming out about the same, would you agree that the option with less risk would be to not contract out.

For a risk averse person, yes.
For someone who'd like to use the 25% TFLS for something specific, be that pay off a mortgage, go ona RTW cruise, splurge on a Ferrari, or just withdraw more money earlier in their retirement because they want to spend it while they can, or have a life limiting condition, no.

The other issue is that the person making the choice isn't the person who'll be taking the pension, even if they have the same name and birthdate. A lot can change your attitude over 40 years !

There's a great quote from a guy called HL Mencken which goes something like "for every complex problem, there is a simple solution. Which is wrong."


And if to prove that here's a post I just stumbled upon from "michaels" (post 1564) in the nice people thread in "debate the economy" or whatever its called. My emphasis in bold.

• 20th Apr 16, 6:27 AM

I was a bit peed off to discover that had I contracted out of serps/s2p for 10 years I could have built up an additional pension and then in the next ten years still pay enough NI to get a full state pension. Instead by the end of this year I will have the full state pension entitlement and all the NI I pay thereafter will not add 1 penny to my pension. At the time I made the decision contracting out was presented as the more risky option and this changing of the rules after the event seems unfair.