Additional State Pension

Joey122

Does anyone know how this is calculated - If you earn 50K for 30 years, what will the additional pension be?

The basic is 87.50 - What does the additonal contribute?

Completely confused!

jem16

I don't think it's a simple as you quoting a figure and someone giving you an amount.

The state 2nd pension used to be know as serps. They have changed it to S2P and made it more attractive for lower earners. In fact by the time you retire it may have changed again - in fact it may even be abolished for all anyone knows.

Try reading this;
http://www.fool.co.uk/Pensions/guides/The-State-Second-Pension.aspx

dunstonh

The additional state pension is SERPS/S2P that we have mentioned in the other threads. It is based on your NI contributions (from 1978). There was also the Graduated pension which was around from 1961-1975.

S2P (the current version) gives those earnig at or above the Qualifying Earnings Factor (QEF) but not more than the Low Earnings Factor (LET) a pension equal to double the accrual rate applyikng to SERPS based on earnings between the QEF and LET.

At 2007/2008 rates the maximum pension from this element of S2P is theoretically £3,390 a year.

The problem with including the Additional State pensions is that the Govt plays around with them and there is no guarantee that it will exist in the future. They have reduced benefits retrospectively three times in the past and there is a 4th time coming in 2010/11 when those earning over £30k a year will be worse off under the new rules coming in then and a 5th time when the state retirement age increases progressively from 65 to 68.

Self employed individuals don't qualify for SERPS/S2P and "most" members of final salary pension schemes and some money purchase occupational pension schemes are contracted out and the benefits are paid as part of their occupational pension.

Its best to forget about the additional pensions and if you get something, then its a bonus. Dont be relying on it. You can bet your life you wont save enough anyway so consider it a potential buffer to help cushion that fact.

Joey122

The reason I ask is to assess whether to opt / contract out or not -

I m 25 and earn about 45k - I also pay into my own pension.

Will my employer benefit from me opting out ? Will they pay less NI ?

How much would I save a month by opting out?

Thanks

noh

The option to contract out for money purchase schemes ceases in April 2010.
If you contract out into a money purchase pension neither you or your employer saves any money.

Nigel

dunstonh

It may be worth you contracting out. You are certainly young enough and you earn enough. Its just a case of whether you see the benefits of contracting out beat the negatives.

Contracting out does allow you to take your benefits from age 55 (and not state retirement age with contracted in). You can also take 25% TFC which you cannot with contracted in. The money is also in your pot and not left to the Govt to reduce again in the future. The negative is investment risk. You need to achieve around 3% above inflation roughly. An experienced investor would consider that a risk worth taking but there is still the chance you wont make as much as contracting in.

Contracting out comes back into favour next tax year as the rebates are being increased making it more attractive than the last few years where Labour reduced the rebate (stealth tax). So, the final years of contracting out could be very worthwhile.

Joey122

Dunsoth:

What do you man by this ? That people should contract out in the last few years?

Also how much would contracting out save me approximately? And what would happen to the NI contribution that my employer would have to pay? Would they pay the same to the pension provider?

Contracting out comes back into favour next tax year as the rebates are being increased making it more attractive than the last few years where Labour reduced the rebate (stealth tax). So, the final years of contracting out could be very worthwhile.

dunstonh

What do you man by this ? That people should contract out in the last few years?

I cannot say such a thing because its a personal decision. The decision to contract out is based on age, income and risk profile. Your age and income fit perfectly for contracting out. Its just a case of whether you prefer investment risk or Govt risk (neither option is risk free) and whether you want to wait until state retirement age or a different retirement age to get your benefits.

The idea of contracting out isnt to save money. It is to invest the money with the aim of providing a higher pension than what the Govt will give you. If you contract out, the Govt pays an NI rebate to the pension provider, which then gets added to your pension and is yours to look after.

Contracting out went out of favour for almost a decade as Labour reduced the rebate (which is stealth tax). It made it harder for investments to produce enough of a return to make it worthwhile. Also, a number of closed pension providers or those with closed investment funds wrote to people giving the impression that it was best to contract in (some even contracted in without even asking). Those that have monitored their investments and kept it under review and understand that values can go down as well as up tended to remain contracted out and we have seen that contracting out has returned to be a viable option again for those people. The changes to pension rules last year which allowed the tax free cash and earlier age from contracted out funds also helped that decision.

Personally, I would contract out but it is really one of personal decision based on age, income and risk profile/opinion.

noh

As I said above the ability to contract out ceases in April 2010 so the final years are this tax year(2007-2008), 2008-2009, 2009-2010. You only have three years including this one that you will be able to contract out for. You and your employer do not pay less NI if you contract out into a money purchase scheme.

Nigel

Joey122

Thats very clear thanks - Any idea how much of a rebate we are talking about to the pension company? Is it 5 pounds or 50 a month?

If i understand you correct employer and employee NI remain the same but the government rebate some of the NI for the additional state pension - Is that right?

This was thanks to dunstoh!!

Joey122

What happens after 2009-2010 ? You cant contract out>? If you have already contracted out what will happen - Will you be forced to contract in?