State pension and contracting out

YaniB_2

I just checked my state pension forecast.


Estimate based on national insurance contributions up to april 2016 = £144.43


Estimate if contributions continue for another 3 years before april 2027 = £155.65


My retirement date is 25th Jan 2028 (56 years old now)


Looking at the contracted out area it states my COPE amount is £66.86 due to being contracted out.


Not fully understanding this last figure in how this has an effect on my pension figures above. I realise I have built up pension in a private scheme but will this change the £155.65 figure I should receive by retirement?


I.e. do they take the £155.65 and subtract what I should receive from the private pension - £66.86 making my state pension worth £88.79 a week.


Or is it because I am still contributing national insurance that I can still attain the £155 figure plus the COPE amount from my personal pension.


Sorry if this seems a silly question.


Yani.

jamesd

COPE is an estimate of how much pension the private scheme might be paying just because of the contracted out money it received. It has already been allowed for in the calculations of your forecast so the state pension will pay you what the forecast says, with no additional deduction for the COPE.

You will get both the private pension from contracting out and the full flat rate state pension if you pay in or get credits for those three years.

YaniB_2

Thanks jamesd
Just out of curiosity do I get the 155 figure due to having contracted back in or was it because I continued making national insurance contributions? Just wondering.

molerat

YaniB wrote: »

Thanks jamesd
Just out of curiosity do I get the 155 figure due to having contracted back in or was it because I continued making national insurance contributions? Just wondering.

Your £144 at April 2016 is set in stone, the £155 is achieved by contributing for another 3 years at £4.75 per year added. Once those 3 years are added you cannot increase your state pension any further.

xylophone

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447195/new-state-pension--effect-of-being-contracted-out.pdf

but for BSP read £119.30 and for NSP £155.65.

Your £144 at April 2016 is set in stone,

Well......:eek:

http://www.thetimes.co.uk/edition/money/is-your-state-pension-forecast-wrong-hmz3ms9d8

http://www.thetimes.co.uk/edition/money/is-your-state-pension-forecast-wrong-hmz3ms9d8

Silvertabby

Mr S and I have both - on-line forecasts and written estimates from DWP. The differences were just a few pence.

YaniB_2

Now I am concerned again !!


Is this on-line calculation possibly wrong ?

xylophone

The problem appears to be arising for people who are deferred members of DB pension schemes whose GMPs are valuing by fixed rate in deferment. See https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

Are you one such?

http://www.thetimes.co.uk/edition/money/is-your-state-pension-forecast-wrong-hmz3ms9d8

Defined-benefit schemes that contracted out were required to provide a guaranteed minimum pension (GMP) payment from this element to each member. If members left the scheme, a set rate was applied each year to re-evaluate this fund until retirement. This is where the problem arises: has the correct rate been used to revalue this element of your pension?

For example, if the scheme is using an annual increase of 8.5% — as many did in the 1980s — but the government is using an annual increase linked to earnings, which is currently closer to 2%, the two figures will be very different.

jamesd

Just read the story they based theirs on:

http://www.thisismoney.co.uk/money/pensions/article-4094300/Has-Government-worked-state-pension-correctly.html

The difference is in the COPE and since you don't get that from the state it makes no difference to what the forecast says about your state pension.

What is wrong is the estimated COPE for defined contribution pensions, which is higher than it would be if you buy an annuity today. But you'd have to be ill or a mug to do that anyway. Defined benefit pensions aren't affected by the investment returns and annuity assumptions but are by some revaluing ones that could mean their guaranteed minimum is lower, but that will only matter if they have to use that.

For your state pension all that happens is that you pay in for long enough to get to the flat rate cap, those three years.

If you want a guaranteed income from a contracted out pot, inflation linked for life, state pension deferral pays something like twice as much as an annuity, so defer instead of buying one. Unless you have lower life expectancy than normal.

xylophone

The Contracted Out Deduction (which is used in the calculation of the Starting Amount for new state pension - see https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447195/new-state-pension--effect-of-being-contracted-out.pdf )

is based on the revalued GMP.

When a person left a DB Scheme, the GMP had to be revalued according to a specific formula chosen by the scheme - see

https://www.barnett-waddingham.co.uk/comment-insight/blog/2014/08/18/what-is-a-gmp/

As far as I understand it, this is where the problem may be occurring with new state pension statements - the revaluation formula used by DWP is not the one that has been used by the scheme - therefore the individual COD being used in the calculation for the starting amount is not correct.

molerat

xylophone wrote: »

As far as I understand it, this is where the problem may be occurring with new state pension statements - the revaluation formula used by DWP is not the one that has been used by the scheme - therefore the individual COD being used in the calculation for the starting amount is not correct.

Which is how I read it. Surely this would only have an impact on those who were contracted out and have a starting amount based on the new rules and be fairly close to retiring. In my own case the error would need to be massive to have any effect on the starting amount.