Opting out of SERPS

minorman

I think contracting out was a scam. Even though I think I am not that thick, I can't quite get my head round it.  The main beneficiary I think would have been my employer (CEGB / National Grid).  I don't think I had an option as the company had (then) its own index linked final salary pension scheme.  Any reduced national insurance contributions by me would have been subject to income tax so HM Gov. giveth and then they tooketh back !  To cap it all, I have a pension notice here from HM Gov. that tells me that, on top of my basic state pension when I retired 10 years ago that I was entitled to an extra £97-26 based on my contributions I did pay over and above the basic line but because I was contracted out I was not entitled to £97-25 of it !  I never could understand that especially as I paid a lot into the company scheme as well as the governments pot and where did the missing penny go ?

Dazed_and_C0nfused

minorman said:

I think contracting out was a scam. Even though I think I am not that thick, I can't quite get my head round it.  The main beneficiary I think would have been my employer (CEGB / National Grid).  I don't think I had an option as the company had (then) its own index linked final salary pension scheme.  Any reduced national insurance contributions by me would have been subject to income tax so HM Gov. giveth and then they tooketh back !  To cap it all, I have a pension notice here from HM Gov. that tells me that, on top of my basic state pension when I retired 10 years ago that I was entitled to an extra £97-26 based on my contributions I did pay over and above the basic line but because I was contracted out I was not entitled to £97-25 of it !  I never could understand that especially as I paid a lot into the company scheme as well as the governments pot and where did the missing penny go ?

How do you work that out 🤔 .

Would you rather have an increased State Pension instead of your CEGB/National Grid pension?

minorman

Here is my simple view.  If I had paid the basic NI contribution I would still get the same basic state pension I get now.  I was contracted out but still paid a lot more above the basic contribution as they have calculated and put it into my pension forecast, based on all my contributions (salary based) a number (the £97-26) what I should be entitled to but you can't have it as you have your own personally paid for scheme as well so we are going to take it away.  On top of that, as there was a slight improvement in taxable pay as I remember it only a very small benefit would have occurred in my take home pay.   Contracting out was I believe a trick to reduce the employers outgoings and also I think someone in HM Gov. suddenly realised that we must find a way to reduce pension outgoings in the future .  As I said, I am not thick but I feel I and probably thousands of others have been bamboozled out of potential pension.  YES I did have the company pension scheme as well but I paid my contributions out of my salary on top of the state contributions.

friolento

minorman said:

 Any reduced national insurance contributions by me would have been subject to income tax

NI contributions were never subject to income tax.

xylophone

Here is my simple view.  

It's not quite that simple.  You are on the old two tier state pension system.

The SERPS scheme was introduced in 1978 - employers/employees were to pay additional NI contributions (depending on salary) to

build up an additional state pension on top of the Basic State Pension.

 


However, in return for guaranteeing a pension that was at least as great as SERP,  an occupational pension scheme could

contract out of the state additional scheme and thus employer and employee paid a lower rate of  NI (which qualified the

employee for just the basic state pension).



This was the Guaranteed Minimum Pension. 

In fact the occupational scheme usually paid far more than the guaranteed minimum.


The Government also undertook that at GMP age (which  at that time aligned with SPA, 60 (F) / 65 (M)), it would be 

responsible for paying  increases on the GMP with the State Pension.


Within ten years. the ballooning cost of paying such increases became clear and the Govt watered down the undertaking such that

the occupational scheme would be responsible for paying increases up to 3% on any GMP accrued  from 6/4/88.


The GMP scheme ended in 1997 with the introduction of a scheme reference test.


The SERPS scheme was changed to SP2 in 2002. It should be noted that those on moderate earnings could accrue some S2P

even if contracted out.


At State Pension Age, the National Insurance Contributions Office calculated the additional pension  you would have earned

between 6/4/78 and 5/4/88 and 6/4/88 and 5/4/97  had you not not been contracted out. (Notional ASP).


From this was deducted the actual GMP   accrued through  your occupational pension scheme between 1978 and 1997 - this is

the COD - what is left is the amount of additional state pension you accrued in that period.



It is not impossible for this to be a negative figure - this typically occurs where an employee has a deferred pension with GMP

where the GMP has been revalued in deferment by so called "fixed rate" rather than 'full rate" (S148 ) - see

here http://www.barnett-waddingham.co.uk/news/2012/07/what-is-a-gmp/

The above is important because of the rules relating to how GMPs in payment are increased.


The employer is not obliged to increase your GMP accrued between 6/4/78 and 5/4/88 - this is the responsibility of the government

and paid by the government as  pre 97 ASP with the state pension - any such increase used to be by September RPI but is now

CPI.

This figure remains fixed as far as the employer is concerned.

The employer has only to increase 88-97 GMP by CPI (or RPI if the scheme rules oblige it) up to 3% with the balance paid by the

government up to CPI . 


Remember that public service schemes ( and quasi public service schemes and some others) always used "full rate" in deferment

so that notional ASP and "real" GMP were roughly the same.




BUT if the notional ASP calculated by NICO is less than the actual GMP, ( COD greater than notional ASP) then there can be no increase i

in 88-97 Additional State pension until one has caught up with the other.

boingy

The "wisdom" at the time was to contract out and that's what myself and most of my friends and colleagues did. I ended up with a second personal pension with the same company I was using for the main pension and received two sets of statements and reports each year. Some years later the "wisdom" changed its mind and said we would be better off contracting back in but I was self-employed by then so SERPs was not really relevant. At some point I consolidated both pensions into another one. If I'm being honest I don't recall when or why I did that!

I've no idea whether I won or lost by contracting out. Back then there was no internet and the numbers and calculations were not really available to allow comparison.

dunstonh

I think contracting out was a scam.

I know we are used to low knowledge consumers calling "scam" when its not but this one is absolutely bizarre.

The main beneficiary I think would have been my employer (CEGB / National Grid).

You also paid lower NI whilst you were contracted out via a DB scheme.   The employer scheme was making up the difference.

I don't think I had an option as the company had (then) its own index linked final salary pension scheme.

It must be a hardship for you to have such a good pension that cost you so little and you paid less to the state as well.

 Any reduced national insurance contributions by me would have been subject to income tax so HM Gov. giveth and then they tooketh back ! 

No it wouldn't.

To cap it all, I have a pension notice here from HM Gov. that tells me that, on top of my basic state pension when I retired 10 years ago that I was entitled to an extra £97-26 based on my contributions I did pay over and above the basic line but because I was contracted out I was not entitled to £97-25 of it ! 

But you are getting that or more from being contracted out and the occupational scheme paying it instead.

I never could understand that especially as I paid a lot into the company scheme as well as the governments pot and where did the missing penny go ?

a) you didn't pay a lot into it.  The contribution rates were far lower than you would have paid to get the same benefit on a DC scheme
b) the company scheme is making up the difference.  So nothing is missing.

I've no idea whether I won or lost by contracting out.

In 1996, the SIB did a review of contracting out and found everyone was financially better off.   When Labour got into power in 1997, they reduced the rebates (effectively a stealth tax) and by around 2003, providers were contracting people back in again unless they had an IFA because it was not suitable for everyone - the earnings requirement was higher and the optimum age to contract back in was lower than in the past).    Towards the end of Labour's time in power, they increased the rebates again.

If you are looking from now, then most people who were contracted out are financially better off.

friolento

boingy said:

The "wisdom" at the time was to contract out and that's what myself and most of my friends and colleagues did. I ended up with a second personal pension with the same company I was using for the main pension and received two sets of statements and reports each year. Some years later the "wisdom" changed its mind and said we would be better off contracting back in but I was self-employed by then so SERPs was not really relevant. At some point I consolidated both pensions into another one. If I'm being honest I don't recall when or why I did that!

I've no idea whether I won or lost by contracting out. Back then there was no internet and the numbers and calculations were not really available to allow comparison.

Very few companies ran two works pension schemes - most had one scheme and it was either contracted out or not. The only choice emplyees had was to opt in or opt out of the works pension scheme. Once opted in, the scheme rules applied.

boingy

friolento said:

boingy said:

The "wisdom" at the time was to contract out and that's what myself and most of my friends and colleagues did. I ended up with a second personal pension with the same company I was using for the main pension and received two sets of statements and reports each year. Some years later the "wisdom" changed its mind and said we would be better off contracting back in but I was self-employed by then so SERPs was not really relevant. At some point I consolidated both pensions into another one. If I'm being honest I don't recall when or why I did that!

I've no idea whether I won or lost by contracting out. Back then there was no internet and the numbers and calculations were not really available to allow comparison.

Very few companies ran two works pension schemes - most had one scheme and it was either contracted out or not. The only choice emplyees had was to opt in or opt out of the works pension scheme. Once opted in, the scheme rules applied.

Mine were personal pensions.