State pension forcast: what does ‘full contribution year’ mean?

Programmer

Last week I went into the government website and got my state pension forecast. I scratched my head over it for a long time but I am hopefully on the way to understanding it. What had been confusing me was the expression ‘years of full contributions’ on the statement. I think I’ve worked out what this means but I would appreciate confirmation. Some details first….

I am 59 and will reach state retirement age in 2024. I got an early retirement in May 2008, and have not worked since, so have not been paying NI since 2008/2009. I worked in one place only, for just short of 30 years. This place had a (presumably contracted-out) final salary pension scheme which I belonged to throughout my time there.

Here Is what the State Pension Summary says:

The forecast pension, if I continue paying NI (or resume paying NI in my case) is £155.68 per week.
The ‘estimate to 5th April 2016’ is £123.77 per week.

The COPE estimate (which I’ve given up trying to understand) is £94.30

The Qualifying Years summary says I have:
- 32 years of full contributions
- 7 years to contribute before April 2023
- 10 years when I did not contribute enough.

It’s that expression ‘years of full contributions’ that had me stumped. These years (or 31 of them) are designed ‘full years’ in the NI record which is appended to the forecast. I initially read ‘full year’ as ‘a year where you built up one year’s worth of state pension’ but I noticed the years relating to the start and end of my employment, in which I only worked a few months, are also marked ‘full year’. So I think ‘full year’ must mean ‘a year during which you have made at least some NI contributions, but which is now closed to further NI contributions’. I'm guessing they have counted 2016/2017 as a 'full year' on the (wrong) assumption that I paid NI in that year, hence their 32 instead of the correct 31. I’ve read elsewhere that even the years where I made 52 weekly payments do not buy 1/35 of a full state pension because of the contracting out effect.

Looking at the rest of the figures in the forecast:

The pension earned to April 2016 is £123.77. The theoretical full pension (2017/2018) is £159.55. £123.77 is a fraction over 27/35 of £159.55. This means (if I am understanding it right) I have earned just over 27 of the required 35 years for a full pension.

If I expand individual years on the appended NI record it gives me the option of paying £733.20 to fill the year 2015-2016, and decreasing amounts to fill the years back to 2009-2010.

Pulling all this together, here is my understanding of the situation.

1. A ‘year of full contributions’, otherwise designated a ‘full year’ means no more than ‘a year in which you paid at least some NI but is now closed to NI contributions’.

2. The number ‘years of full contributions’ on the forecast (32 in my case) has no relevance to calulations; those who get the full £159.55 pension will very likely have more than 35 ‘years of full contributions’ on their record.

3. The April 2016 figure (£123.77 for me) is calculated by a mysterious process not known to mortals.

4. However the secret priesthood has made this calculation, up to April 2016 I have earned approx 27 effective pension years out of the national maximum 35.

5. If I am certain I am never going to work again (I am certain!) I could buy the seven missing years 2009/2010 to 2015/2016 (for about £5000 total); price is held until 5th April 2019. This would get me to with a year of a full pension.

6. I could then buy one future year before 2024 to get the full £159.55

Have I got that right? Your help is appreciated!

I’m going to do something easier now, like Mandarin Chinese or physics of black holes.

molerat

The term "to April 2016" is a bit misleading as it really means using the NI record up until April 2016 but the pension is calculated using April 2017 amounts. At April 2016 "years" became a bit irrelevant as you were given an amount. Under the old scheme that is where you would have stopped. You now have a second bite at the cherry and can better that figure at an excellent rate of return on your investment.

1. A full year is where you earned, in the weeks you paid NI, the equivalent of 52 times the lower earnings level - you do not need to contribute for 52 weeks.

2. As you have in excess of 30 years contributions and a fairly large COPE amount indicated then purchasing pre 2016 years will not add to your pension.

3. The April 2016 figure is the higher of the "old" or "new" pension calculations, £119.30 / 30 x 30 + S2P/Grad/Add pension or £155.65 / 35 x 32 - COPE. The latter calculation gives you £48 so the old calculation was used - you cannot get less than what you had already accrued.

5. As above, buying pre 2016 years will not add to your pension. You could buy a maximum of 3 pre 2016 years - bringing you up to the 35 maximum - but they would not increase your "new" £48 to anywhere close to the "old" £120.75 and it could not add to that figure as you already have in excess of the maximum old 30 years. You need to buy post 2016 years. £159.55 - £123.77 = £35.78 / £4.56 = 8 more years to contribute to reach the full amount. (assuming your SRA is after April 2024)

Programmer

Thanks for this molerat, you have confirmed I don't understand state pensions

A few questions though...

1. Why is the government website offering me the opportunity to buy pre-2016 years when doing so can make no difference to my final pension? Has it been written in a 'once size fits all' manner and doesn't have the inbuilt intelligence to offer only sensible options?

2. My retirement date is in March 2024, so of the post-April 2016 NI years I only have 2016/2017 to 2022/2023 years, i.e. 7 in total, to contribute. But I need just short of 8 to get a full pension. Does this mean that whatever I do, it is simply not possible to get the full £159.55 pension? i.e. am I stuck with a theoretical maximum of £155.68?

3. In your last paragraph you mention the figure £120.75. Where did this come from? Do you mean £123.77?

greenglide

Has it been written in a 'once size fits all' manner and doesn't have the inbuilt intelligence to offer only sensible options?

Got it in one!

DWP over many years removed any useful data from the printed pension forecasts, either to stop people asking awkward questions and HMRC (it is them that owns this site) seem determined to remove anything sensible and useful!

At the design stage the wording would have been approved by Senior civil servants and probably Ministers so it must be right.

p00hsticks

Programmer wrote: »

2. My retirement date is in March 2024, so of the post-April 2016 NI years I only have 2016/2017 to 2022/2023 years, i.e. 7 in total, to contribute. But I need just short of 8 to get a full pension. Does this mean that whatever I do, it is simply not possible to get the full £159.55 pension? i.e. am I stuck with a theoretical maximum of £155.68?

Yes, your maximum is £155.68 - the year in which you reach state pension age doesn't count.

See this guide for info on topping up;
https://www.royallondon.com/Global/documents/GoodWithYourMoney/TOPPING-UP-YOUR-STATE-PENSION-GUIDE.pdf

Programmer

Thanks Poohsticks, I saw that royallondon guide a couple of weeks ago after MoneyMail mentioned it...I didn't understand it but it might make more sense after this thread, so I'll have another crack at it.

It's a slow process but I think I'm starting to understand. Leaving aside difficult stuff like COPE and precise figures, is this more or less the situation:

1. The old system comprised a basic pension and an additional earnings related pension, originally called SERPS, then State Second Pension. The basic pension was approx £120 when the new system came in; SSP was additional and the amount depended on earnings.

2. As my occupational pension scheme, as most schemes, contracted out of SSP, I was only ever paying NI towards the old basic pension (£120 approx in April 2016)

3. The new system merged the basic pension and SSP into one single level of state pension. This is why it was referred to as a 'flat rate' pension. Not flat in the sense of everyone getting the same, but flat in the sense of not being in two parts.

4. Because I only ever paid towards a basic pension, buying NI years after I left work (2008) and before April 2016 can only contribute towards the 'old' basic pension, not the new and higher post-April 2016 pension.

5. Since I had very nearly (or maybe actually) paid all the NI I could towards the 'old' pension, buying 2008 to April 2016 years would achieve nothing as I am already at (or near) maximum.

6. To increase beyond the £123.77 April 2016 starting point I must buy NI contributions (class 3 since I am not working) relating to years AFTER 2016. If I diligently do so until retirement I can reach £155.68.

Have I got it? I do hope so!

p00hsticks

Programmer wrote: »

Have I got it? I do hope so!

Spot on. You are in a good position in that not only will you be getting the 'old' basic state pension amount that you always expected, plus a private pension, but you now have the opportunity to increase that state pension rate by over £30 a week by voluntarily buying post 2016 NI years (Given that you say you are not working and presuming you have no opportunity of getting NI credits - for example by providing child care for grandchildren).

jamesd

1. Correct. Your entitlement under these rules was calculated up to April 2016 and used as the foundation amount from then on.

2. Yes but under S2P there was a little earnings-related being accrued. Not much but some.

3. Single tier in the sense that one year is one year regardless of earnings and adds 1/35th of the single tier amount until you reach its maximum. This is added to your foundation amount from the old rules.

4. Right, under the old rules the full basic state pension was accrued after 30 years and you already have that. Buying those years adds to basic state pension and since you're at the maximum already it gets you nothing.

5. Right.

6. Right.

You've got it.

COPE isn't too hard either. It's just an estimate of how much of your work pension is due to your employer taking over responsibility for paying the earnings-related part of the state pension.

Programmer

Thank you P00hsticks and jamesd . I have learned more from all who contributed to this thread than from several days of ploughing through documents on gov.uk :cool:. I will come back about COPE later on....need to rest my brain first.

One question: on my pension statement 2016-2017 is marked 'Your record for this year is not available yet' even though we are past April 2017. Does anyone know when 2016-2017 becomes open for paying class 3 contributions?

molerat

Programmer wrote: »

3. In your last paragraph you mention the figure £120.75. Where did this come from? Do you mean £123.77?

£123.77 / 1.025 (the 2017 triple lock uprate) which would be your starting amount figure at April 2016.

The contribution figures are usually updated around October for those who have no recorded contributions for the previous year. You have until 5th April 2019 to pay at the historical rate for 2016-17.

Programmer

I'm briefly returning to this thread in the hope someone can help me understand COPE, which I can't make sense of even though the definition seems coherent. What confuses me is that my workplace pension, which I am receiving now having retired early, is based on a simple calculation of final salary and years worked (it's actually from two final salary schemes as we were all outsourced by our original employer, but remained in the same office. The new employer created a new final salary scheme for us). I can't make sense of a 'contracted out pension equivalent' when what I am being paid (now) is simply based on final salary and years worked.

Let me put it as a couple of questions and maybe that will clarify for me:

I'll pretend I currently get £300 a week total from my workplace schemes.
I'll assume I make all the required class 3 contributions up to retirement in 2024, giving me my maximum £155.68 state pension. This includes £94.30 COPE according to the government forecast.

Fast forward to retirement in 2024 (ignore inflation). I go down to the post office to collect my first week's state pension.

1. Will the state be paying me £155.68, or that amount minus COPE, i.e. £61.38?
2. Will the amount paid by my workplace schemes suddenly change when I reach retirement age, or stay at £300? If it changes, how is it likely to change? (The first employer is a big UK insurance company, the second is a large American IT outsourcing company)