Contracted Out - Was The Impact On Our State Pensions Really Communicated Properly?

GSP

As far as I remember being CO happened probably over 30 years ago when I was a much younger man in his late twenties (being younger was much less pension savvy). I maybe wrong but it was done to apparently give us more money in our payslip (unless I am getting confused with salary sacrifice)?

I’m not sure if we had a choice though, just what were the advantages of being contracted out? Was it something that benefitted the employer more than the employee?

It seems now who would be ‘contracted out’ if they had a choice? Is there something ‘a bit wrong’ with the whole concept and should it ever had been brought in?

Seems we just have to accept the ‘initiative’ and pay these extra years. Just who would have agreed with this at the time if they knew they had to make extra payments totalling thousands of pounds now?

Are we the ones at fault and having to pay for it now? Contracted out seems very murky to me.

GunJack

one question - would you rather have a state pension of £15k a year (basic SP plus SERPS/S2P), or a combined state and company pension of £20+k a year?? That's what contracting out did for you.

GrubbyGirl_2

My COPE Estimate is £104.65 but my pension is £408.  I know what I prefer

Marcon

GSP said:

As far as I remember being CO happened probably over 30 years ago when I was a much younger man in his late twenties (being younger was much less pension savvy). I maybe wrong but it was done to apparently give us more money in our payslip (unless I am getting confused with salary sacrifice)?

I’m not sure if we had a choice though, just what were the advantages of being contracted out? Was it something that benefitted the employer more than the employee?

It seems now who would be ‘contracted out’ if they had a choice? Is there something ‘a bit wrong’ with the whole concept and should it ever had been brought in?

Seems we just have to accept the ‘initiative’ and pay these extra years. Just who would have agreed with this at the time if they knew they had to make extra payments totalling thousands of pounds now?

Are we the ones at fault and having to pay for it now? Contracted out seems very murky to me.

Hopefully everyone in a contracted out final salary scheme (which is what I suspect you were in), because they not only paid lower National Insurance, they will have a DB pension well in excess of the alternative: state pension only.

You don't have to make 'extra payments totalling thousands of pounds'; your choice if you wish to do so. You're still vastly better off by having a pension from a DB scheme which was contracted out.

You are also overlooking the fact that the state pension system was a very different animal 30 years ago...

pinnks

Similarly £85ish and £650ish - I really wish I had not contracted out.  I could have made myself so much worse off...

Stubod

...ooohhh...I can feel another law suit coming on...perhaps we could tag on the back of the WASPI women??

dunstonh

Contracted Out - Was The Impact On Our State Pensions Really Communicated Properly?

Yes.   
DB pensions would have sections in the scheme booklet explaining it.
DC pensions would vary depending on how you chose to contract out.

The reality is that most consumers didn't care in their younger years.

 I maybe wrong but it was done to apparently give us more money in our payslip (unless I am getting confused with salary sacrifice)?

Contracting out with a DB scheme would reduce the NI you pay.
Contracting out with a DC scheme would not.

I’m not sure if we had a choice though, just what were the advantages of being contracted out? Was it something that benefitted the employer more than the employee?

Again, depends on the pension.   Contracted out with a DB scheme with lower NI paid benefited you.   Effectively, with a DB scheme, you paid less NI and got a lower state pension but the DB scheme made up the difference.  You would not have a choice with a DB pension.

Contracting out with a personal pension, whilst sharing the same phrase "contracting out", was quite different.   You paid the same NI but a chunk of it was rebated to your personal pension and built up your pension fund.  

in 1996, the SIB did a review and found that everyone contracted out up to that point was financially better off.   There were periods from 1997 onwards where it began to become weaker with DC schemes  (largely on the back of stealth tax by reducing the rebates and a period of poor returns) and by 2003, most people who were contracted out on DC schemes were being contracted back in again.    You needed to be a higher earner to make it worthwhile until a few years before it was abolished where it became more favourable again.   DB pensions were good right up until the end.

It seems now who would be ‘contracted out’ if they had a choice? Is there something ‘a bit wrong’ with the whole concept and should it ever had been brought in?

You can no longer contract out, but putting that aside, I would.     
DB schemes meant you paid less and got more.  it just changed who was paying it.
DC schemes meant you got control of a fund that was yours (and could be passed to spouse/children etc) as well as the ability to take lump sums from it.

Seems we just have to accept the ‘initiative’ and pay these extra years. Just who would have agreed with this at the time if they knew they had to make extra payments totalling thousands of pounds now?

You are mistaken.    The ability to make extra payments now is to get even more. Not to make up for something lost.

Sarahspangles

Did contracting out give us more money on our payslip, or did it release money we could contribute to our DB pensions?  In my 20s I definitely remember my understanding was that working in the public sector meant I wasn’t earning as much as my private sector peers, but it was a good pension scheme.

squirrelpie

The OP doesn't seem to have understood much about contracting out at the time, or even now. They might want to read something like https://techzone.abrdn.com/public/pensions/Tech-guide-contracting-out

Basically some money that would have been taken by the government and used to augment your state pension, was instead taken by a private pension company and used to augment your pension. One guess as to which most people thought was the better bargain. Since the new pension rules were introduced in 2016 it's been completely obvious that having been contracted out was beneficial.

xylophone

In 1978, the government of the day introduced the State Earnings Related Pension Scheme.  This would mean relatively generous state benefits in addition to the Basic State Pension.

Employers providing defined benefit pension schemes were permitted to "contract out" of SERPS which meant that both the employer and the employee paid a lower rate of National Insurance.

The employee would accrue Basic State Pension but no SERPS.


The Government was concerned that unscrupulous employers would elect to contract out their employees so saving  employer NI but then not provide a pension that was at least equal to SERPS - to counter this, regulations required that the DB scheme must provide a pension at GMP age (60 F/65 M which was then SPA) that was at least equal to the SERPS benefit that would have been accrued if the employees had been contracted in. This was the Guaranteed Minimum Pension.

In fact, the pension provided by these DB schemes was usually far more generous than this statutory minimum.

As a sweetener to employers, the government undertook to index link that part of the occupational pension that was equivalent to GMP when the employee started to draw the state pension.

This was done through a mechanism that operated within the state pension system.

In simple terms, at SP commencement, the pensioner's state pension statement showed (under Additional State Pension) the notional amount that would have been received had he been contracted in.

From this would be deducted (Contracted Out Deduction) the amount representing GMP within his occupational pension.

In the following year, the ASP figure would be increased in line with RPI while the COD remained the same.

By 1988, the government of the day became alarmed at the cost this represented so came up with a new regulation.

This required that from 6/4/88, the DB schemes would have to index link post 88 GMP by up to 3% RPI while the government would index link the balance.

Again this was achieved through the mechanism described above.

In 1997, the GMP system ended.  From then onwards, the contracted out schemes were subject to what was known as the Reference Scheme Test. The schemes had to provide benefits in line with a standard set by the government - these are known as Section 9 (2B) rights.

In 2002, SERPS was replaced by S2P - a feature of this scheme was that even if contracted out, moderate earners could accrue some additional state pension.

In 2016, the New State Pension was introduced - it was intended that this should be single tier - so goodbye Additional State Pension.

Now read on....

https://www.gov.uk/government/publications/new-state-pension-if-youve-been-contracted-out-of-additional-state-pension/the-new-state-pension-transition-and-contracting-out-fact-sheet

Or (for the man in the street?)

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/181237/single-tier-pension-fact-sheet.pdf

You will observe that those who had been contracted out and whose "starting (foundation) amount was less than a new state pension, had the prospect (according to circumstances) of improving the SA up to a full NSP through additional contributions/credits.

And NSP up to the full amount was to be index linked by the government under the "Triple Lock"...

Dazed_and_C0nfused

squirrelpie said:

The OP doesn't seem to have understood much about contracting out at the time, or even now. They might want to read something like https://techzone.abrdn.com/public/pensions/Tech-guide-contracting-out

Basically some money that would have been taken by the government and used to augment your state pension, was instead taken by a private pension company and used to augment your pension. One guess as to which most people thought was the better bargain. Since the new pension rules were introduced in 2016 it's been completely obvious that having been contracted out was beneficial.

^^^ This all day long.

A lot of people are doing very nicely having paid reduced NI for many years and now have the opportunity to reach the standard new State Pension 😊