Over 85 year old querying amount taken contracted out of state pension

Parsnip1

My step Dad is querying why he has approx £90 a month deducted from his state pension due to having contracted out. My Mum of a similar age has £30 from hers.They are both aware that at some time in their early working lives they contracted out and therefore paid lower national insurance contributions, but this was only for probably a maximum of four years each, and they don't understand why they have been losing money from their state pension for over 20 years. Surely it should have balanced itself by now?
We have tried to understand it, but it all seems mightily complicated! Are we missing something!? Any clearly explained advice very very welcome, thank you

Dazed_and_C0nfused

Parsnip1 said:

My step Dad is querying why he has approx £90 a month deducted from his state pension due to having contracted out. My Mum of a similar age has £30 from hers.They are both aware that at some time in their early working lives they contracted out and therefore paid lower national insurance contributions, but this was only for probably a maximum of four years each, and they don't understand why they have been losing money from their state pension for over 20 years. Surely it should have balanced itself by now?
We have tried to understand it, but it all seems mightily complicated! Are we missing something!? Any clearly explained advice very very welcome, thank you

Almost certainly yes.

How many pensions do each of them have?

How much is your dad's weekly State Pension? 

Why do you think something is being "deducted" from it?

Is he aware the old "basic" State Pension has completely different rules to the "new" State Pension?

molerat

What do you mean by "deducted" from their pensions, there is nothing deducted for being contracted out.  Are you comparing their pre 2016 "old" pension amounts to the "new" post 2016 pension of £221.20 ?

Parsnip1

Each have state pensions.
Each have a local government pension (that they are pretty sure they didn't contract out from)
My step Dad has a £35 a month pension from an employer that he thinks he could well have contracted out from.
Mum doesn't have any other employer pensions

Step Dad's state pension is £176 a week.

He got the information from the annual letter that the DWP Pension Service send in April to inform him of increases in benefits:
It says how your benefit is made up - Basic State Pension £176
Pre 97 annual State Pension £163
Less Contracted-Out Deduction (COD) of £95

Thank you!

Parsnip1

molerat said:

What do you mean by "deducted" from their pensions, there is nothing deducted for being contracted out.  Are you comparing their pre 2016 "old" pension amounts to the "new" post 2016 pension of £221.20 ?

No, it is listed as deducted on a letter from the DWP as I've replied in a seperate post above. Thank you

Dazed_and_C0nfused

Parsnip1 said:

Each have state pensions.
Each have a local government pension (that they are pretty sure they didn't contract out from)
My step Dad has a £35 a month pension from an employer that he thinks he could well have contracted out from.
Mum doesn't have any other employer pensions

Step Dad's state pension is £176 a week.

He got the information from the annual letter that the DWP Pension Service send in April to inform him of increases in benefits:
It says how your benefit is made up - Basic State Pension £176
Pre 97 annual State Pension £163
Less Contracted-Out Deduction (COD) of £95

Thank you!

Why does he think he wasn't contracted out of the local government pension?

Contracting out usually applied to that scheme from 1978 to 2016.  With members benefiting from an excellent pension and paying reduced rate of NI.

Do you know how much his local government pension is?

molerat

The contracted out deduction is from the second state pension.  Local government pensions were automatically contracted out.  If that is his new 2025 pension then he is receiving the full basic pension applicable to his retirement date.  If he was not contracted out he could have received up to another £222 per week additional pension but then he would not be getting his local government pension.  He has not lost anything, he is just not getting the additional pension he did not contribute to.  The contracted out deduction could be larger than the additional pension it is being deducted from but cannot take it below £0 so cannot affect the basic pension entitlement.

badmemory

If they are over 75 then they are on the basic state pension as I am.  Currently 169.50 going up to £176.45 later this month.  They don't have any SERPS, which gives some of us extra, because they were in employments that gave them a pension in exchange for not paying the extra state payments (serps etc).

Put another way - they get a different pension from employment in exchange for a lower payment to the state pension, this other pension will be higher than the extra state pension would have been if they had paid for it.

Marcon

Parsnip1 said:

Each have state pensions.
Each have a local government pension (that they are pretty sure they didn't contract out from)
My step Dad has a £35 a month pension from an employer that he thinks he could well have contracted out from.
Mum doesn't have any other employer pensions

Step Dad's state pension is £176 a week.

He got the information from the annual letter that the DWP Pension Service send in April to inform him of increases in benefits:
It says how your benefit is made up - Basic State Pension £176
Pre 97 annual State Pension £163
Less Contracted-Out Deduction (COD) of £95

Thank you!

So your step dad is receiving the full rate of basic state pension applicable to someone who reached their state pension age before April 2016 (ie £176).

During his membership of the Local Government Pension Scheme (LGPS), he paid a lower rate of NI and didn't build up any entitlement to State Additional Pension (SERPS, later State Second Pension). The COD of £95 refers to the State Additional Pension benefits which (in broad terms) he might otherwise have built up during this period had he not been 'contracted out' of the State Additional Pension. But he was contracted out, so the LGPS rather than the state is paying benefits in addition to his basic state pension - and I imagine his LGPS pension is considerably more than £95 a week?

Sometimes giving people information they don't actually need only serves to increase their confusion and sense of being hard done by - something which happens all too often in pensions.

QrizB

Just in case it wasn't already clear:

Parsnip1 said:

Each have a local government pension (that they are pretty sure they didn't contract out from)

The LGPS final salary pension was a contracted-out scheme. The only way to have remained contracted-in would have been to choose not to join LGPS, and to have paid the extra NI to the government instead.

Parsnip1 said:

It says how your benefit is made up - Basic State Pension £176
Pre 97 annual State Pension £163
Less Contracted-Out Deduction (COD) of £95

While your step-dad was working in local government, if he'd been contacted in his earnings would have earned him an extra £95 a week of state pension.
Instead, he paid less NI and has his LGPS pension.

Is his LGPS pension more, or less, than £95 a week?

xylophone

You mention a local govt pension - the LGPS was contracted out of SERPS/S2P until 5/4/16. It appears that FIL was also a member of another contracted out scheme in another employment.



Your relatives are likely to have started work in the mid to late fifties/early sixties.

From 1961 to 1975, they are each likely to have accrued some Graduated Pension - this was an early form of additional state pension but it was not generous, offering just a very modest supplement to the Basic State Pension.

As the seventies dawned, there was increasing pressure on the government to offer some pension provision related to earnings

for those who were not fortunate enough to have access to an occupational pension scheme.


The 1975 Pension Act  introduced the State Earnings Related Pension Scheme which came into force in 1978.  Those who were

"contracted in" to SERPS (and their employers) paid a higher rate of National Insurance - this would entitle them to  a pension

over and above the basic state pension when they reached State Pension Age.


Employers offering an occupational pension scheme could contract out of SERPS.  They and their employees who were

members of the occupational scheme paid a lower rate of NI which would entitle the members to only the Basic State Pension at

SPA.

Those members would however be accruing an occupational pension which by law had to be at least as great as they would

have accrued had they been contracted in to SERPS. This was known as the Guaranteed Minimum Pension.

In practice, members of occupational schemes usually accrued a pension far greater than the GMP.


As a sweetener to employers, the government promised to pay increases on the GMP (index linked to the increase in prices), 

through the state pension when the person reached GMP age (which at that point  aligned with SPA, being 60 for females, 65 for

males).



In 1988, realising the costly nature of this promise, the government changed the rules  such that from that date, the scheme

would have to pay any increase in the GMP up to 3% RPI while the government picked up the tab for the balance.


 GMP system  ended in 1997 being replaced by the Reference Scheme Test.



SERPS was replaced by S2P in 2002 - because of a change in structure, it was possible for certain people to accrue some S2P

even if contracted out  - for further reading see 

https://en.wikipedia.org/wiki/State_Earnings-Related_Pension_Scheme

https://en.wikipedia.org/wiki/State_Second_Pension


At State Pension Age, the National Insurance Contributions Office calculated the SERPS/S2P  the individual  earned between

6/4/78 and 5/4/88 and 6/4/88 and 5/4/97. 

From this was deducted the  GMP built up through  the contracted out scheme (s) between 1978 and 1997 - this was the COD -

what was left was the amount of additional state pension accrued in that period.


When your FIL started drawing his state pension  presumably in around 2005, he would have received a letter from DWP showing

his entitlement.

His pre 97 ASP was calculated and the COD deducted.


Since then, the ASP has increased by the RPI/CPI and his COD has been recalculated and the appropriate deduction made. as

explained above. 


If more detail is required, see

https://researchbriefings.files.parliament.uk/documents/SN02674/SN02674.pdf






At SPA (65 for your FIL  and 60 for his wife), your in laws should have received a letter similar to this from the administrators of their occupational pension schemes

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