Income drawdown vs annuity purchase at retirement

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jem16 wrote: »

It depends on how long you've been contracted out. However let's go with worst case scenario and you're like me who has been contracted out all of my working life. With the transition stage your state pension will be worked out on what you would have for under the old rules against what you would get under the new rules. The higher of these two calculations is what becomes your foundation amount and that's what you'll get.

Under the present rules, if you have 30 years NI contributions you are entitled to the full basic state pension which is around £113pw from memory. Having been contracted out there is no additional pension from SERPS or S2P (state 2nd pension) so your entitlement is £113pw.

Under the new rules you will need 35 years NI contributions for the full flat rate pension. However those who have been contracted out will lose some of that with a deduction that has yet to be announced. However if it falls below the £113pw (or whatever the basic state pension will be in April 2016), under the transition period, you will get the higher amount.

So worst case scenario is that you will not have less than £113 pw and you may have more. You may even have more than the flat rate pension if you do have some entitlement to SERPS or S2P. This is why it will be important to get a state pension forecast. Everyone will be notified of their foundation amount under the old scheme around April 2016 I believe.

Jem16 - Thanks very much for this clarification. I could not find explanation of any minimum figure on the gov.uk site nor did the gov.uk call centre agent I spoke to mention it. So you've helped me out. Gov.uk should reply to me with my SP forecast in 2 weeks.

jem16 wrote: »

There may also be the option of using her AVC pot to draw down in the same way we're suggesting for you and leave her LGPS pension until normal retirement age. However it's not clear yet whether AVCs will come under the new rules or not. It's always possible that she could transfer the AVC pot to somewhere that did allow it.

Yes, I've now checked and I think that last option is allowed by her scheme, which I see could reinforce the "pre-SP draw down gap filler" strategy outlined by you and others in this thread. And maybe Scottish Widows will be fully flexible anyway.

Which pretty much answers my original question I believe, but in a way I'd not envisaged. Many thanks everyone for your help. Hopefully this discussion will be useful to others who find this thread and are in a similar position to us.

jamesd

The full flat rate state pension is expected to be £155 or so after inflation adjustments to the £144 original level. A person who is working and paying NI just gets an extra roughly £4.60 added to their flat rate state pension until they reach that income level, then future years add nothing extra. For those who work only under the new system it would take 35 years of work to get to the full level.

What this means is that those who contracted out are winners under the new system. Instead of getting nothing more after 35 years of work they both keep all that they have got from contracting out and continue to accrue more state pension entitlement until they reach the new target. So given it was a choice between something and nothing for extra years of work, they always end up being winners.

How contracting out is handled in the state pension statement depends on how the contracting out was done. If it was done into a personal pension the state pension statement will be accurate. If it was done into a workplace defined benefit pension like final salary the state pension statement will be assuming that they weren't contracted out and when the foundation amount is calculated for the flat rate system a contracted out deduction will be made to correct for this, just as happens now when such people reach state pension age under the current system.

There are some people who even though they contracted out will have a foundation amount that is above the flat rate level. They don't lose this but like those who didn't contract out they will get no more for paying in for extra years. So to fine tune the "you win" bit, if your state pension statement says you would get more than the flat rate level under the old rules, you won't win but also won't lose. This will mainly apply to people who are quite close to state pension age when the new system comes in, perhaps within ten to possibly fifteen years of it. Or sometimes longer for higher earners.

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jamesd wrote: »

The full flat rate state pension is expected to be £155 or so after inflation adjustments to the £144 original level. A person who is working and paying NI just gets an extra roughly £4.60 added to their flat rate state pension until they reach that income level, then future years add nothing extra. For those who work only under the new system it would take 35 years of work to get to the full level.

What this means is that those who contracted out are winners under the new system. Instead of getting nothing more after 35 years of work they both keep all that they have got from contracting out and continue to accrue more state pension entitlement until they reach the new target. So given it was a choice between something and nothing for extra years of work, they always end up being winners.

How contracting out is handled in the state pension statement depends on how the contracting out was done. If it was done into a personal pension the state pension statement will be accurate. If it was done into a workplace defined benefit pension like final salary the state pension statement will be assuming that they weren't contracted out and when the foundation amount is calculated for the flat rate system a contracted out deduction will be made to correct for this, just as happens now when such people reach state pension age under the current system.

There are some people who even though they contracted out will have a foundation amount that is above the flat rate level. They don't lose this but like those who didn't contract out they will get no more for paying in for extra years. So to fine tune the "you win" bit, if your state pension statement says you would get more than the flat rate level under the old rules, you won't win but also won't lose. This will mainly apply to people who are quite close to state pension age when the new system comes in, perhaps within ten to possibly fifteen years of it. Or sometimes longer for higher earners.

Thanks for the extra detail. I've been able to determine from pay slips that I was NOT contracted out from 1997 till 2010. Not sure about other years yet.

jamesd

HMRC's Contracted out Helpline can tell you which years you were contracted out for and which firm received the rebates.

jem16

Offgrid wrote: »

Yes, I've now checked and I think that last option is allowed by her scheme, which I see could reinforce the "pre-SP draw down gap filler" strategy outlined by you and others in this thread. And maybe Scottish Widows will be fully flexible anyway.

SW will perhaps adopt the new rules although they don't have to. The main issue is that the AVC is attached to a. DB pension and may not allow it. This is the part that remains to be qualified.

jem16

jamesd wrote: »

How contracting out is handled in the state pension statement depends on how the contracting out was done. If it was done into a personal pension the state pension statement will be accurate. If it was done into a workplace defined benefit pension like final salary the state pension statement will be assuming that they weren't contracted out and when the foundation amount is calculated for the flat rate system a contracted out deduction will be made to correct for this, just as happens now when such people reach state pension age under the current system.

This seems to be a grey area in forecasts. I've always been contracted out so only have something like 42p graduated retirement. I've no SERPS or S2P. My state pension forecasts make no mention at all of a contracted out deduction. I basically have the full basic state pension plus 42p.

jem16

Offgrid wrote: »

Thanks for the extra detail. I've been able to determine from pay slips that I was NOT contracted out from 1997 till 2010. Not sure about other years yet.

When were you a member of the USS? That's a contracted out scheme.

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jem16 wrote: »

When were you a member of the USS? That's a contracted out scheme.

From mid-1979 to mid-1997 with about 3.5 years out studying and working abroad. 15.5 years USS service. 14 years definitely NOT contracted out. 2 years as yet unknown status.

jem16

Offgrid wrote: »

From mid-1979 to mid-1997 with about 3.5 years out studying and working abroad. 15.5 years USS service. 14 years definitely NOT contracted out. 2 years as yet unknown status.

Well perhaps you may find that your current entitlement is higher than the flat rate pension.

jamesd

For the USS portion you're going to see a contracted out deduction applied to your additional state pension. It won't be strictly accurate but you might assume that the ASP portion of the state pension will be (total working years - 15.5) / (total working years) times whatever the statement says about the ASP amount. That will probably be on the pessimistic side because the USS was probably at a time of lower than average income for you and ASP is earnings-related.

With only potentially 16 years counting towards your foundation amount plus the rest accrued between now and introduction I think that you're likely to be below the flat rate level, which means that more working years or purchased years will continue to increase it. Won't know for sure until foundation amount calculations are available, though, unless your basic plus ASP plus any GRP is still below the flat rate level.