FIRE Girls Pension Diary - Aim High & Dream Big

Firegirl

I’ve heard the term SERPS but have no idea what it really means. Looks like from the wording I opted out.  I think this might have been arranged for a big group of us when we were tuped from one company to another.

Emmmmm ….time to read some other threads and chat GPT usage!

so opting out meant that NI contributions were directed to my private pension. And private pension has to replace what I’d have earned through SERPs.

Wonder if my state pension will be less because of the opt out. 

State Pension Summary says the following:

You can get your State Pension on xxth xxxx 2047

Your forecast is £221.20 a week, £961.83 a month, £11,541.90 a year

It says at the bottom, ‘You’ve been in a contracted-out pension scheme.’

hugheskevi

Firegirl said:

I’ve heard the term SERPS but have no idea what it really means. Looks like from the wording I opted out.  I think this might have been arranged for a big group of us when we were tuped from one company to another.

Emmmmm ….time to read some other threads and chat GPT usage!

State Earnings Related Pension Scheme.

A second-tier State Pension that was in place from 1978-2002. It was related to earnings, the more you earned the more SERPS you accrued, up to a cap.

It was possible to 'contract-out' of SERPS, in a variety of ways that changed over time, particularly in 1988. In many cases this involved paying less National Insurance in exchange for not accruing any SERPS. In occupational schemes employees didn't get a choice about contracting out or not, the scheme was either contracted out or not. Almost all Defined Benefit schemes were contracted-out.

Things got more complicated with the shift from Defined Benefit to Defined Contribution. In some forms of contracting-out it was possible to get rebates into a private Defined Contribution pension instead of building up SERPS. Individuals got the choice to contract-out into personal pensions with no employer involvement. At some points the State favoured contracting-out by the rates offered, and incentivised the rebate rates to encourage take-up. Complex calculations were performed by actuaries and others to determine whether it was optimal for individuals to contract out or to remain in SERPS. Over time the results of this calculation changed, this caused angst amongst pension schemes - should they advise members to contract back in? Default members back in unless they opted out? The usual sort of things you can envisage.

In 2002 SERPS was replaced by State Second Pension (S2P) - similar to SERPS, but with higher accrual for lower earners and more credits for non-earners offered.

Contracting-out from S2P continued until the abolition of contracting out in 2016. In 2016 contracting out was abolished as part of the move to the new State Pension, those who had contracted-out were given a lower starting credit in the new State Pension relative to an otherwise identical individual who had been contracted in. This meant those who had remained contracted-in reached maximum new State Pension entitlement much earlier than those contracted-out, at which point they ceased accruing more pension but still paid the same rate of National Insurance. Those who contracted-out could carry on accruing new State Pension much longer in their career, thus eventually having both a full new State Pension as well as their private contracted-out pension whereas the contracted-in person just gets the full new State Pension despite having paid higher National Insurance contributions overall. Most people reaching State Pension age in 2025 or later will be able to accrue sufficient new State Pension to remove the contracted-out deduction amount applied to their 2016 credit into the new State Pension system.

Those contracted out into private sector Defined Benefit schemes who reached State Pension age after April 2016 found that the changes removed part of the uprating of the contracted-out benefits accrued before 1997. Under the old state pension system, the state uprated part of the benefit under a complicated indexation sharing system (which created a lot of administrative headaches between schemes and the Inland Revenue).

So along with the self-employed, the big winners from the 2016 new State Pension changes were public sector workers (they have all their past pension accrual uprated despite the change). Were they appreciative? No, at least not for large numbers. Most of them considered that they had been cheated by having a contracted-out deduction applied to their new State Pension starting amount, whereas they felt they should get the full rate.

A cautionary tale not to underestimate the risk of political change when undertaking detailed comparative calculations to determine the optimal course of action.

Purplelady65

Thank you @hugheskevi for the detailed explanation re contracting in / out and SERPS. I have read other articles about it but your explanation is a lot easier to understand. 

Firegirl

@hugheskevi

Thanks for the info.  You posted that when I was researching and amending my comment. 

It looks like if I work another 11 years I’ll be entitled to £221.20 a week state pension.

Wonder what political change is coming for pensions in the future. Makes it quite hard to plan!   Very good point re cautionary tale!

I think it looks as though I’ve opted out and there’s no going backwards so I’m thinking it looks like if I work another 11 years it won’t matter.   I have the underpin on the pension and should get full state pension? I really don’t know if this comment is correct!

hugheskevi

Firegirl said:

It looks like if I work another 11 years I’ll be entitled to £221.20 a week state pension.

I think it looks as though I’ve opted out and there’s no going backwards so I’m thinking it looks like if I work another 11 years it won’t matter.   I have the underpin on the pension and should get full state pension? I really don’t know if this comment is correct!

As long as you reach the full rate of new State Pension by State Pension age, whether you were contracted-in or out in the past doesn't matter.

It would, with the benefit of hindsight, mean being contracted-out as much as possible would have been better, assuming sufficient time to accrue new State Pension before State Pension age.

michaels

I have purposefully not looked at how much contracting out would have added to a private pension pot based on my income at the time to avoid crying even more about how shafted I have been because I took the 'safe' option of keeping the payments going to SERPs/S2P.  Perhaps north of 50k?

Firegirl

Thanks @hugheskevi your explanations have been really helpful after I’ve read it a few times I understand now.

@michaels so sorry I’m bringing up something that has hit you hard.  It’s mad how things can change over time and there’s really no way of deciding if it’s the right thing to do or not.  I often think this about pensions vs ISA.

MiserlyMartin

Hello. As someone else pointed out at the start of the thread, you have a bigger pot than me with far more years to go than I have. What is your 'number' that you really need? 

I am always thinking that I don't have enough to retire on, yet an adviser told me I could retire last year. But at the moment I enjoy my job and don't want to retire. Retiring for me will be a chance to live abroad and travel and you need to do that while you are still relatively young. My total pension pot is only around 160K and I really wanted to retire in 3, maximum 8 years time. (way before state pension kicks in - already have my full NI contributions done) So I really need to step it up! I do have property investments though and about 400k mainly in savings accounts/ISAs etc. I live in a cheap house in a terrible area and I was keeping the cash to use to move house to a nice area at 3 times the price - so that's why I have been as scared of paying it into a pension as I am of spending money (like you, LOL)

MallyGirl

MiserlyMartin said:

Hello. As someone else pointed out at the start of the thread, you have a bigger pot than me with far more years to go than I have. What is your 'number' that you really need? 

I am always thinking that I don't have enough to retire on, yet an adviser told me I could retire last year. But at the moment I enjoy my job and don't want to retire. Retiring for me will be a chance to live abroad and travel and you need to do that while you are still relatively young. My total pension pot is only around 160K and I really wanted to retire in 3, maximum 8 years time. (way before state pension kicks in - already have my full NI contributions done) So I really need to step it up! I do have property investments though and about 400k mainly in savings accounts/ISAs etc. I live in a cheap house in a terrible area and I was keeping the cash to use to move house to a nice area at 3 times the price - so that's why I have been as scared of paying it into a pension as I am of spending money (like you, LOL)

You are missing out on a fair bit of tax relief- can you not increase your pension contributions till retirement (funding the shortfall in salary from savings if necessary)

LL_USS

@hugheskevi how come you know so much . Thanks for sharing. Sometime I feel it's a blessing I don't have a lot of choices for my pension contributions - my head would not be able to deal with all these regulations, which keep changing with changing governments.

@MallyGirl, I suppose Firegirl squirrels away heavily into pension and ISAs, which suits her as her current income from work is a lot and thus she benefits from tax reliefs with these. Meanwhile MiserlyMartin perhaps benefits more from investing in property (great if it was done from earlier on) and also has a plan to upscale his main house hence the cash (if mostly in ISAs then little tax implication). It seems to work for his case.

With an average pay check, I have played safe by having some volunteer contribution to pension (just enough to be tax efficient, and will reduce even more as my income reduces in the next few years), but I leave any remaining money into property investment (the returns have been great and I have got all the benefit because it was doing up and moving up for the main residence). Now I'm accumulating ISAs rather than all-in for pension volunteer contribution, as I have plans to buy too, for my children.