Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@.

Search
  • FIRST POST
    • Geoffo M
    • By Geoffo M 4th Apr 13, 12:56 PM
    • 1,145Posts
    • 440Thanks
    Geoffo M
    Totally confused by Contracted Out Deduction Letter
    • #1
    • 4th Apr 13, 12:56 PM
    Totally confused by Contracted Out Deduction Letter 4th Apr 13 at 12:56 PM
    I'm 65 next month when I'll start claiming my state pension. I've already had a pension forecast saying I should get 107.45 a week basic basic plus 4.62 additional state pension (I've been contracted out for most of my working life).

    Now I've received a letter this morning saying that my total Contracted Out Deduction figure is 131.26 a week and I think they are saying that had I not been contracted out, I would have received this amount in addition to my state pension. But that can't be right can it because I understood the maximum state pension for someone who has never joined a private scheme & has worked the 30 qualifying years was around 144. Not my 107.45 plus the 131.26 = 238.71. Very confusing, they can't mean the COD will come off my 112 can they as it is more than that?

Page 1
    • Linton
    • By Linton 4th Apr 13, 1:04 PM
    • 11,731 Posts
    • 12,189 Thanks
    Linton
    • #2
    • 4th Apr 13, 1:04 PM
    • #2
    • 4th Apr 13, 1:04 PM
    I'm 65 next month when I'll start claiming my state pension. I've already had a pension forecast saying I should get 107.45 a week basic basic plus 4.62 additional state pension (I've been contracted out for most of my working life).

    Now I've received a letter this morning saying that my total Contracted Out Deduction figure is 131.26 a week and I think they are saying that had I not been contracted out, I would have received this amount in addition to my state pension. But that can't be right can it because I understood the maximum state pension for someone who has never joined a private scheme & has worked the 30 qualifying years was around 144. Not my 107.45 plus the 131.26 = 238.71. Very confusing, they can't mean the COD will come off my 112 can they as it is more than that?
    Originally posted by Geoffo M

    State pension + S2P/SERPS can be a lot more than 144. So I think your original understanding is correct. I believe the 144 comes from what someone who was only eligible for the basic 107 would actually get: they would be entitled to Pension Credit which would raise their income to around 144.
    • xylophone
    • By xylophone 4th Apr 13, 3:13 PM
    • 31,956 Posts
    • 19,850 Thanks
    xylophone
    • #3
    • 4th Apr 13, 3:13 PM
    • #3
    • 4th Apr 13, 3:13 PM
    I'm 65 next month when I'll start claiming my state pension. I've already had a pension forecast saying I should get 107.45 a week basic basic plus 4.62 additional state pension (I've been contracted out for most of my working life).

    http://www.pensionschampions.co.uk/?q=node/13

    http://forums.moneysavingexpert.com/showthread.php?p=60319901#post60319901

    post 18.
    Last edited by xylophone; 04-04-2013 at 3:15 PM. Reason: addition
    • Geoffo M
    • By Geoffo M 4th Apr 13, 8:19 PM
    • 1,145 Posts
    • 440 Thanks
    Geoffo M
    • #4
    • 4th Apr 13, 8:19 PM
    • #4
    • 4th Apr 13, 8:19 PM
    I'm 65 next month when I'll start claiming my state pension. I've already had a pension forecast saying I should get 107.45 a week basic basic plus 4.62 additional state pension (I've been contracted out for most of my working life).

    http://www.pensionschampions.co.uk/?q=node/13

    http://forums.moneysavingexpert.com/showthread.php?p=60319901#post60319901

    post 18.
    Originally posted by xylophone
    Thanks, I wish I had just one detailed letter like the example in your post 18, at least that's clear if a little lengthy. I can't understand how mine can be as high as 131 a week I've had deducted, surely if I'd stayed in the state scheme & never joined my company's scheme I would never now be entitled to a state pension of 238 would I?

    • JohnB47
    • By JohnB47 4th Apr 13, 8:41 PM
    • 1,619 Posts
    • 516 Thanks
    JohnB47
    • #5
    • 4th Apr 13, 8:41 PM
    • #5
    • 4th Apr 13, 8:41 PM
    Thanks, I wish I had just one detailed letter like the example in your post 18, at least that's clear if a little lengthy. I can't understand how mine can be as high as 131 a week I've had deducted, surely if I'd stayed in the state scheme & never joined my company's scheme I would never now be entitled to a state pension of 238 would I?
    Originally posted by Geoffo M
    I'm confused too as to why your COD figure is so high. 'SeekTruth' on that thread that xylophone quoted, said that the Additional State Pension and COD amounts should be roughly the same.

    Also, the COD is a deduction to the Additional State Pension, not the Basic State Pension, so I would assume that it simply wipes out the 4.62 figure and leaves you with 107.45 (or whatever it is now that its been uprated by 2.5%).

    Can anyone confirm these assumptions?
    • Geoffo M
    • By Geoffo M 4th Apr 13, 8:51 PM
    • 1,145 Posts
    • 440 Thanks
    Geoffo M
    • #6
    • 4th Apr 13, 8:51 PM
    • #6
    • 4th Apr 13, 8:51 PM
    I'm confused too as to why your COD figure is so high. 'SeekTruth' on that thread that xylophone quoted, said that the Additional State Pension and COD amounts should be roughly the same.

    Also, the COD is a deduction to the Additional State Pension, not the Basic State Pension, so I would assume that it simply wipes out the 4.62 figure and leaves you with 107.45 (or whatever it is now that its been uprated by 2.5%).

    Can anyone confirm these assumptions?
    Originally posted by JohnB47
    Well I was expecting a tiny bit of Additional State Pension for the first 3 years of my working life when I wasn't eligible to join the company scheme. Right at the end of my COD letter it says "Total COD 131.26 This is the same amount as that shown on your Award Notice & Statement of Details issued by the Dept of Work & Pensions". Now I haven't received that yet, though I applied for my pension about a month ago, I'm wondering now if when I get that, it will be the same as the statement mentioned in post 18 of xylophone's link? Could that be it? Still can't understand why it's 131, seems much too high to me?

    • SeekTruth
    • By SeekTruth 4th Apr 13, 9:36 PM
    • 203 Posts
    • 122 Thanks
    SeekTruth
    • #7
    • 4th Apr 13, 9:36 PM
    • #7
    • 4th Apr 13, 9:36 PM
    I'm confused too as to why your COD figure is so high. 'SeekTruth' on that thread that xylophone quoted, said that the Additional State Pension and COD amounts should be roughly the same.

    Also, the COD is a deduction to the Additional State Pension, not the Basic State Pension, so I would assume that it simply wipes out the 4.62 figure and leaves you with 107.45 (or whatever it is now that its been uprated by 2.5%).

    Can anyone confirm these assumptions?
    Originally posted by JohnB47
    Just goes to show how complicated the subject can get.

    Yes, on the thread quoted I did say the ASP1 and the COD amounts should be roughly the same. But that was for one particular person who had given some details of their contribution history. And note, ASP1 refers to SERPS earned between April 1978 and April 1997, not to the whole Additional State Pension.

    The case quoted on this thread seems to be different. The amount of COD quoted of 131.26 does seem high. All I can assume is that Geoffo M left his contracted out pension scheme at some point, so his benefit was deferred. During the deferred period the pension scheme can select one of 2 or 3 permissible revaluation methods for the Guaranteed Minimum Pension (GMP). I'm guessing Geoffo M's scheme selected fixed rate revaluation, whereas the scheme referred to on the other thread was LGPS, which selects Average Earnings revaluation. This is important because the COD is equal to the GMP and is revalued in the same way. So, during the deferred period the GMP (and hence COD) are increasing at a fixed rate that could well have been higher than the average earnings increases that ASP1 was revalued by over the same period.

    The end result of these revaluations seems likely to be that COD is considerably higher than ASP1.

    Using the terminology introduced by xylophone in the other thread, Geoffo M should receive as state pension the sum of the following:
    1. Basic State Pension: 107.45 in 2012/13, 110.15(?) for 2013/14
    2. ASP1 minus COD (if this is negative, as seems likely in Geoffo M's case, then it is treated as zero)
    3. ASP2 (SERPS from April 1997 to April 2002)
    4. ASP3 (S2P from April 2002 to present)
    5. GRB (Graduated Retirement Benefit from 1961 to 1975)
    In addition the pensions scheme(s) through which he was contracted out between 1978 and 1997 will pay him (as part and parcel of his pension from it/them) his GMP (totalling about 131.26 per week).
    • JohnB47
    • By JohnB47 4th Apr 13, 9:50 PM
    • 1,619 Posts
    • 516 Thanks
    JohnB47
    • #8
    • 4th Apr 13, 9:50 PM
    • #8
    • 4th Apr 13, 9:50 PM
    Thanks for that. Sorry to have confused things.

    Also, sorry if I'm butting in here Geoffo M but could I just clarify one thing and then I'll butt out?

    SeekTruth - we're going from thinking that Geoffo is being told he has a deduction of 131.26 heading his way, to it being an actual payment of 131.26 he'll be getting? Right?

    How can that be?

    Thanks again.
    Last edited by JohnB47; 04-04-2013 at 10:07 PM.
    • SeekTruth
    • By SeekTruth 4th Apr 13, 10:12 PM
    • 203 Posts
    • 122 Thanks
    SeekTruth
    • #9
    • 4th Apr 13, 10:12 PM
    • #9
    • 4th Apr 13, 10:12 PM
    Thanks for that. Sorry to have confused things.

    Also, sorry if I'm butting here Geoffo M but could I just clarify one thing and then I'll butt out?

    SeekTruth - we're going from thinking that Geoffo is being told he has a deduction of 131.26 heading his way, to it being an actual payment of 131.26 he'll be getting? Right?

    How can that be?

    Thanks again.
    Originally posted by JohnB47
    In order for a pension scheme to contract people out of the Additional State Pension (between 1978 and 1997) it had to ensure it provided a pension as least as good as the ASP, this was termed the Guaranteed Minimum Pension (GMP). So the contracted out scheme has to pay Geoffo M at least the GMP (131.26).

    Because of the neat(!) way the state took on responsibility for some/all of the inflation increases of the GMP once in payment, ASP1 still includes SERPS, even though the employee was contracted out. But, so that they did not get the money twice, once from their employer (via GMP) and once from the state (via ASP1) the COD is deducted from ASP1. In Geoffo M's case the COD is 131.26, from a rough calculation I think the most that ASP1 could possibly be is about 100. So ASP1 minus COD is a negative number (31 or worse), however for calculating the state pension a negative result here is treated as zero.

    In other words the COD of 131.26 is both a payment and a deduction. It is part and parcel of the payment from the contracted out scheme and it is a deduction in the calculation of the state pension.
    • JohnB47
    • By JohnB47 4th Apr 13, 10:24 PM
    • 1,619 Posts
    • 516 Thanks
    JohnB47
    OK. Thanks.

    I get it now.
    • Geoffo M
    • By Geoffo M 5th Apr 13, 5:03 PM
    • 1,145 Posts
    • 440 Thanks
    Geoffo M
    Just goes to show how complicated the subject can get.

    Yes, on the thread quoted I did say the ASP1 and the COD amounts should be roughly the same. But that was for one particular person who had given some details of their contribution history. And note, ASP1 refers to SERPS earned between April 1978 and April 1997, not to the whole Additional State Pension.

    The case quoted on this thread seems to be different. The amount of COD quoted of 131.26 does seem high. All I can assume is that Geoffo M left his contracted out pension scheme at some point, so his benefit was deferred. During the deferred period the pension scheme can select one of 2 or 3 permissible revaluation methods for the Guaranteed Minimum Pension (GMP). I'm guessing Geoffo M's scheme selected fixed rate revaluation, whereas the scheme referred to on the other thread was LGPS, which selects Average Earnings revaluation. This is important because the COD is equal to the GMP and is revalued in the same way. So, during the deferred period the GMP (and hence COD) are increasing at a fixed rate that could well have been higher than the average earnings increases that ASP1 was revalued by over the same period.

    The end result of these revaluations seems likely to be that COD is considerably higher than ASP1.

    Using the terminology introduced by xylophone in the other thread, Geoffo M should receive as state pension the sum of the following:
    1. Basic State Pension: 107.45 in 2012/13, 110.15(?) for 2013/14
    2. ASP1 minus COD (if this is negative, as seems likely in Geoffo M's case, then it is treated as zero)
    3. ASP2 (SERPS from April 1997 to April 2002)
    4. ASP3 (S2P from April 2002 to present)
    5. GRB (Graduated Retirement Benefit from 1961 to 1975)
    In addition the pensions scheme(s) through which he was contracted out between 1978 and 1997 will pay him (as part and parcel of his pension from it/them) his GMP (totalling about 131.26 per week).
    Originally posted by SeekTruth
    Thank you so much, your understanding of this is far greater than mine will ever be. Don't know if this helps you to understand my circumstances but 94 of that 131 comes from a section 32 buy-out plan I bought in Nov 1987 (would you believe just 10k then is going to buy me an annual pension of just over 9k now, I'm amazed & very pleased with that). The other 37 comes from being in my last employer's scheme from 1987 to 2008. Just to clarify though, will I still get my 112 state pension do you think - I'm concerned they might be going to try and take the 131 figure off the 112 to leave me with nothing in state pension? Again, a massive thanks to SeekTruth & JohnB here who understands far more than I ever will - just wish I could join you more in your understanding.
    Last edited by Geoffo M; 05-04-2013 at 5:09 PM.

    • xylophone
    • By xylophone 5th Apr 13, 8:04 PM
    • 31,956 Posts
    • 19,850 Thanks
    xylophone
    will I still get my 112 state pension do you think -
    First of all, you get the basic state pension to which your NI contributions have entitled you - if you have at least thirty years then you will receive a full BSP of 110.15 (2013-14).

    Each year this will increase by 2.5% or CPI or average earnings, whichever is the greatest. This is the so called "triple lock".

    At your age, you are likely to have been in employment before 1976 so will probably be entitled to some graduated pension on top of the BSP. http://www.needanadviser.com/html/article.php/zcid/354/type/article/finance/State_Graduated_Retirement_Pension_Scheme

    The SERPS scheme was introduced in 1978 - employers/employees paid 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, the employer could pay a lower rate of employer/employee NI.
    This was the Guaranteed Minimum Pension. (The GMP scheme ended in 1997 with the introduction of a scheme reference test.)

    The SERPS scheme was changed to SP2 in 2002.

    At State Pension Age, the National Insurance Contributions Office calculates the additional pension you would have earned between 6/4/78 and 5/4/88 and 6/4/88 and 5/4/97 as if you had not been contracted out. (Notional ASP)

    From this they deduct the actual GMP you have built up through your s32/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 the GMP accrued between 6/4/78 and 5/4/88 - this is the responsibility of the government and paid by the government as 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 see here http://www.opalliance.org.uk/increases.htm which is typical of public service schemes but for RPI read CPI. Remember that public service schemes 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 in 88-97 Additional State pension until one has caught up with the other.
    • xylophone
    • By xylophone 6th Apr 13, 8:13 PM
    • 31,956 Posts
    • 19,850 Thanks
    xylophone
    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/...what-is-a-gmp/
    If you are interested, you might find this worth a look (Read as plain HTML)
    https://docs.google.com/viewer?a=v&q=cache:rZgVz5VexKsJ:www.pensions-ombudsman.org.uk/determinations/docs/2008/aug/s00105.doc+&hl=en&gl=uk&pid=bl&srcid=ADGEESgiKcsmn xgDw7ol1014C0ioGmCk0WHXZqn7KRLG-TD_cJvuIeaQP3a_LNpfhusNNw1jOH0OZrBPV!!!!cL6bOac8Ht VlNZrgZLTThcdyKyCzbLII5BEc56JvWk6cRCuzCR9LTt5&sig= AHIEtbRmfTyQW8eGaDqvSdmRqQ0g-yYPaQ
    • SeekTruth
    • By SeekTruth 7th Apr 13, 11:42 PM
    • 203 Posts
    • 122 Thanks
    SeekTruth
    Thank you so much, your understanding of this is far greater than mine will ever be. Don't know if this helps you to understand my circumstances but 94 of that 131 comes from a section 32 buy-out plan I bought in Nov 1987 (would you believe just 10k then is going to buy me an annual pension of just over 9k now, I'm amazed & very pleased with that). The other 37 comes from being in my last employer's scheme from 1987 to 2008. Just to clarify though, will I still get my 112 state pension do you think - I'm concerned they might be going to try and take the 131 figure off the 112 to leave me with nothing in state pension? Again, a massive thanks to SeekTruth & JohnB here who understands far more than I ever will - just wish I could join you more in your understanding.
    Originally posted by Geoffo M
    Yes you will get the full basic state pension (110.15 for the 2013/14 tax year).
    You may get a little extra.
    Some time in the future (very difficult to estimate when) you will start to get rather more extra on top of the basic. Suggest you regard this as a nice bonus when it happens rather than basing any plans on it.
    • JohnB47
    • By JohnB47 8th Apr 13, 10:55 PM
    • 1,619 Posts
    • 516 Thanks
    JohnB47
    Thank you so much, your understanding of this is far greater than mine will ever be. Don't know if this helps you to understand my circumstances but 94 of that 131 comes from a section 32 buy-out plan I bought in Nov 1987 (would you believe just 10k then is going to buy me an annual pension of just over 9k now, I'm amazed & very pleased with that). The other 37 comes from being in my last employer's scheme from 1987 to 2008. Just to clarify though, will I still get my 112 state pension do you think - I'm concerned they might be going to try and take the 131 figure off the 112 to leave me with nothing in state pension? Again, a massive thanks to SeekTruth & JohnB here who understands far more than I ever will - just wish I could join you more in your understanding.
    Originally posted by Geoffo M
    Thank you but I take no credit for any knowledge here. I only ask questions and the experts answer. 'Pensions' is a big and complicated subject and has become more so because of the impending transition between old and new.
  • Geoffers007
    If you are interested, you might find this worth a look (Read as plain HTML)
    Originally posted by xylophone
    Thanks for this. I'm in a similar position in that my COD is currently 101.56 and ASP 53.56, so there will be no "increase on my pre 1988 GMP paid with my state pension," that my RBS bank pension advice letter suggests will be the case.

    Since the difference has only decreased by 0.58 during the last year, it seems unlikely I will live long enough to wipe this out! I can understand why it's right that there is a COD since I was contracted out, but it doesn't seem fair that I should lose out on future pension increases (pre 1988 GMP accounts for 66% of my bank pension).
  • howy22
    This has been a most informative thread. However can anyone explain why I have a GMP of 98.82/wk, a COD from H M Revenue & Customs (NI Contributions) of 98.82/wk, yet The Pension Service uses a COD of 133.56 to calculate my State Pension. Endless discussions with the relevant departments seams to create more and more confusion.
    • xylophone
    • By xylophone 22nd Apr 13, 5:49 PM
    • 31,956 Posts
    • 19,850 Thanks
    xylophone
    Are you just about to receive your first payment of state pension?
    Can you upload your statement with personal information removed?
  • howy22
    Hello xylophone,

    Is it possible for me to upload a pdf file with the relevant details or do I need to retype the info?
    • xylophone
    • By xylophone 23rd Apr 13, 1:00 PM
    • 31,956 Posts
    • 19,850 Thanks
    xylophone
    Is it possible for me to upload a pdf file with the relevant details or do I need to retype the info?
    It is possible to copy in an image ( I notice that other posters occasionally do this with forms etc) although I have to say that I have had difficulty with doing this.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

1,704Posts Today

8,996Users online

Martin's Twitter