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  • FIRST POST
    • Geoffo M
    • By Geoffo M 4th Apr 13, 12:56 PM
    • 1,145Posts
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    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 2
  • howy22
    I think it will be quicker to cut and paste.

    I received my first state pension payment in Aug 2012 (attaining 65)
    At this point the Pension Service gave a statement as follows:-

    How Your benefit is made up From AUG 12

    Basic Pension £107.45

    Additional Pension based on earnings from 6/4/1978
    to 5/4/1997 of £98.83 less Contracted-Out Deduction
    (COD) of £132.43 you earned from an employer's or
    personal pension scheme from 6/4/1978 to 5/4/1997

    NIL

    Additional Pension payable based on earnings
    From 6/4/1997 to 5/4/2002 £0.48
    From 6/4/2002 also based on caring/incapacity £2.09
    Shared Additional Pension NIL
    Extra - Basic Pension NIL
    - Additional Pension NIL
    - Shared Additional Pension NIL
    Uprating of Contracted-Out Deduction Increments NIL
    Graduated Pension £5.00
    Invalidity Addition/ Incapacity Age Addition NIL
    Age Addition NIL

    Money for other people NIL


    The amount each week is £115.02


    At the same time I received a statement from HM Revenue

    (NI Contributions) with a COD figure of £132.43/wk


    This year I have received further statements as follows:-




    From APRIL 2013

    HOW.YOUR BENEFIT IS MADE UP

    basic State Pension £110.15
    Pre 97 additional State Pension £101.00
    less Contracted-Out Deduct ion (COD) of £133.56
    Total payable £0.00
    Post 97 additional State Pension £2.63
    Graduated Retirement Benefit £5.11

    The amount each week is £117.89




    The HM Revenue statement for 2013 now shows a

    COD of £98.82.


    I've requested a private pension breakdown from my provider
    which gives a figure of £98.82/wk for GMP which HM Revenue

    tell me is effectively COD in my case.


    I understand that AP and COD are recalculated each year but don't understand the large change to the HMR figure, why different COD's are being used by different agencies and why the HMR figure, which reconciles with my pension provider, isn't used by the Pension Service.


    Hope you can throw some light on the matter.
    • SeekTruth
    • By SeekTruth 23rd Apr 13, 6:46 PM
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    SeekTruth
    Some more questions for you!

    1. How many periods of contracted out employment did you have between 6/4/1978 and 5/4/1997?
    2. Did you leave that (any of those) employer(s)? If so, when? [I'm assuming that at some stage you left a deferred pension with a pension scheme that opted to revalue GMP by a fixed percentage - the date of leaving will tell us what percentage was used.]
    3. Do you have documentation from the date of leaving that gives the value of GMP at that date?
    • xylophone
    • By xylophone 23rd Apr 13, 7:12 PM
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    xylophone
    Have you had a look at post 12?
    1978 saw the introduction of SERPS. Employers/employees paid additional NI contributions to build up a pension in addition to the basic state pension.

    However, in return for guaranteeing a pension that was at least as great as would be provided by SERPS, employers/employees could contract out of the SERPS scheme and pay lower NI contributions.

    As a sweetener to employers, the state guaranteed that when the state pension came into payment, ( and in the case of men especially this was often several years after the occupational scheme came into payment) it would pay inflation linked increases on that part of the occupational pension that represented the GMP.

    In 1988, this government wished to save money on the inflation linking guarantee and therefore the requirement became that the Occupational Scheme would have to inflation link that part of the occupational pension representing post 88 GMP up to 3%- if inflation was over 3% the government would pay the balance.

    The GMP scheme ended in 1997.

    When you drew your occupational pension, the whole of it would have increased in payment according to Scheme rules up to State Pension Age.

    However, at SPA, a calculation would have been done splitting your occupational pension into its component parts -

    pre 1988 GMP This amount remains constant.
    1988-1997 GMP
    What remained over and above - the "excess"

    At the same time, NICO would have calculated what you would have accrued in additional state pension had you not been contracted out during the years 1978-1997.

    So, in your particular case, when you drew your state pension, it was calculated that you would have had ASP of £98.82 had you not contracted out. This is notional GMP and is the pre 97 ASP shown on your statement.

    However, your particular circumstances have given you a contracted out deduction that is greater than this "notional ASP" because that part of your occupational pension that represented your GMP has been increasing in deferment at a rate greater that that used by the state. (See post 12)

    Your occupational pension provider can give you a statement showing your situation as in red paragraph above.

    In effect, you will receive no increase on the pre 97 Additional State Pension until your Contracted Out Deduction is exceeded by pre 97 ASP. See post 13.

    Hope this helps.
    Last edited by xylophone; 24-04-2013 at 12:24 AM.
  • howy22
    Hi SeekTruth,
    I was only with one employer so I assume I only had one period of being contracted out.
    I left that employer in March 2001 and received my occupational pension from that date.
    The only GMP figures I have are the ones I requested recently, as below.

    Pre 88 GMP £60.65/wk
    Post 88 GMP £38.17/wk
    Total GMP £98.82/wk
  • howy22
    Thanks for the references xylophone.

    I understand the mechanism of reducing the AP by COD or GMP and the possibility of it resulting in a negative figure but I don't understand why the Pension Service uses a COD of £133.56 when the COD from HMR is £98.82 and my Total GMP is £98.82.

    Am I missing something?
    • xylophone
    • By xylophone 23rd Apr 13, 10:32 PM
    • 31,962 Posts
    • 19,854 Thanks
    xylophone
    The ASP (GMP) of £98.82 was what you would have accrued through SERPS had you not been contracted out.

    The £132 .43 was your GMP from your pension scheme revalued to State Pension Age presumably using Fixed Rate Valuation? 6.25% per annum? This is in excess of the increase in average earnings for the period in question.
    See http://www.barnett-waddingham.co.uk/news/2012/07/what-is-a-gmp/
    And see http://www.nidirect.gov.uk/understanding-the-additional-state-pension
    How additional State Pension is increased

    Additional parts of the State Pension rise in line with the increase in prices. These include:

    the State Second Pension (S2P)
    the State Earnings-Related Pension Scheme (SERPS)
    Graduated Retirement Benefit
    Extra State Pension received for deferring or putting off (deferring) your State Pension claim (also called ‘increments’)
    Until you reach State Pension age, the State Second Pension or SERPS you have built up will usually increase with the growth in average earnings. This is also known as ‘revaluation’.
    Last edited by xylophone; 23-04-2013 at 11:06 PM.
    • SeekTruth
    • By SeekTruth 24th Apr 13, 10:23 AM
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    • 122 Thanks
    SeekTruth
    Howy22, I share your puzzlement regarding HMRC stating in 2012 that your COD was £132.43 and in 2013 that it was £98.82.

    I am guessing that your GMP at the time of leaving your employment (March 2001) was about £70/wk. At that time it would have equalled both your contracted out Additional Pension earned between 1978 and 1997 and also the COD. Between March 2001 and August 2012 the AP was revalued by average earnings, resulting in an increase to £98.83 [perhaps someone who understands better than I could let us know precisely which figure would be used - see http://www.legislation.gov.uk/uksi/2011/475/schedule/made or http://www.legislation.gov.uk/uksi/2012/187/schedule/made]
    Between March 2001 and August 2012 the GMP and COD would have been increased by a method selected by your pension scheme, either average earnings or fixed rate (6.25% pa). If average earnings was used then the result would be GMP and COD at August 2012 of £98.83/wk, if fixed rate was used then the result would be about £130/wk.

    Can I suggest that you ask your pension scheme which revaluation method was adopted. If the answer is average earnings then it appears DWP are using the wrong COD figure for you - and it would certainly be worth your while to get it corrected. If the answer is fixed rate then DWP are using the correct figure but HMRC have given the wrong figure this year.
    • xylophone
    • By xylophone 24th Apr 13, 12:16 PM
    • 31,962 Posts
    • 19,854 Thanks
    xylophone
    am guessing that your GMP at the time of leaving your employment (March 2001) was about £70/wk. At that time it would have equalled both your contracted out Additional Pension earned between 1978 and 1997 and also the COD. Between March 2001 and August 2012 the AP was revalued by average earnings, resulting in an increase to £98.83 [perhaps someone who understands better than I could let us know precisely which figure would be used
    S148 Orders http://www.watsonwyatt.com/europe/pubs/statistics/render2.asp?ID=14

    http://www.barnett-waddingham.co.uk/news/2012/07/revaluation-for-early-leavers/

    "Any GMP element of a preserved pension must also be revalued, but the method is different to revaluing excess benefits. Currently, trustees have the choice of two different methods of revaluing GMPs: Full Rate increases or Fixed Rate increases. Schemes which opt for increases at Full Rate increase their GMPs annually in line with Section 148 Orders (previously known as Section 21 Orders). Section 148 Orders are based on the increase in the National Average Earnings Index each year.

    Fixed Rate revaluation increases are determined by the date of termination of pensionable service. The annual percentage increase is fixed and depends on the date of leaving as follows:
    Date of Leaving
    Annual Percentage Increase
    Between 6 April 1978 and 5 April 1988
    8.50%
    Between 6 April 1988 and 5 April 1993
    7.50%
    Between 6 April 1993 and 5 April 1997
    7.00%
    Between 6 April 1997 and 5 April 2002
    6.25%
    Between 6 April 2002 and 6 April 2007
    4.50%
    Between 5 April 2007 and 5 April 2012
    4.00%
    After 6 April 2012
    4.75%

    The revaluation period for GMPs is the number of complete tax years between a member's date of leaving and their GMP Pension Age. For members retiring before they reach GMP Pension Age, the revaluation period for GMPs would normally be the number of 6 Aprils between the two dates."

    As you say, the OP needs to check with his Occupational Scheme Administrator how his GMP was revalued - his statements of benefits for 2012 and 2013 and his original letter from HMRC are consistent with the scheme's having used FiRR.
    Incidentally, did you read SnowMan's post at http://forums.moneysavingexpert.com/showthread.php?p=60651909#post60651909
    • SnowMan
    • By SnowMan 24th Apr 13, 4:19 PM
    • 3,204 Posts
    • 5,998 Thanks
    SnowMan
    Re howy22s figures:

    The national average earnings revaluation factor for ASP will have been 1.454 see here (it is the 11 year revaluation figure shown in the left hand column of 45.4% and adding 1 to give the factor, and 11 years is the number of complete tax years from leaving to age 65)

    The revaluation factor assuming the company pension scheme used fixed rate revaluation for the GMP (COD) will have been 1.948 (= 1.0625 ^ 11).

    The GMP (COD) at age 65 was 132.43 and the ASP was 98.83.

    So working back:

    ASP at date of leaving (March 2001) = 98.83/1.454 = 67.97

    GMP (COD) at date of leaving = 132.43/1.948 = 67.98

    So ignoring a small rounding error of 1p, the GMP (COD) and ASP were the same at date of leaving, and it is just the different revaluation that applies to ASP and GMP that has caused them to diverge.

    So the only thing left to clarify is that the company scheme did indeed use fixed rate revaluation (it is highly likely they did). This can be confirmed by looking at a company scheme deferred benefit statement or referencing the calculation of the revalued GMP under the company scheme which should be £132.43.
    Last edited by SnowMan; 24-04-2013 at 4:39 PM.
    I came, I saw, I melted
  • howy22
    Thanks for everyone's input.

    I'll check with the company's pension department as to which revaluation method they use.

    The haze is beginning to clear.
  • howy22
    Have just spoken with my pension provider who have confirmed that the GMP element is revalued using Section 148.

    Does this suggest DWP are using the wrong COD figure?
    • SeekTruth
    • By SeekTruth 25th Apr 13, 11:53 AM
    • 203 Posts
    • 122 Thanks
    SeekTruth
    Have just spoken with my pension provider who have confirmed that the GMP element is revalued using Section 148.

    Does this suggest DWP are using the wrong COD figure?
    Originally posted by howy22
    Yes, it sounds to me as though the DWP have the wrong figure - and it is possibly making a difference to your pension.

    I think the HMRC are responsible for calculating the 'official' GMP/COD figure. It sounds as though in 2012, for whatever reason, HMRC calculated the wrong figure, and so, presumably, advised DWP the wrong figure. In 2013, HMRC have corrected their calculation - I've no idea why they got it wrong in the first place and what caused them to recalculate in the second place. I don't know whether HMRC will automatically give DWP the new figure and it will all sort itself out, or whether you need to do anything to prompt HMRC to give DWP the information.

    Can I show my ignorance here? You refer to receiving a HMRC (NI Contributions) statement in both 2012 and 2013. Are these statements that you explicitly requested? I'd be surprised if you received one a year automatically, so is there any indication on the 2013 statement as to why it has been issued?
    • xylophone
    • By xylophone 25th Apr 13, 1:33 PM
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    • 19,854 Thanks
    xylophone
    When you became eligible for state pension did you receive a letter from your Occupational Pension Administrator along the following lines:-

    Dear Mr Howy,

    Anyco Pension Fund

    We refer to your pension paid by Anyco Pension Fund.

    We have now received confirmation from HMRC of the amount of GMP that is payable from your 65th birthday.

    The GMP elements of your pension increase in payment at different rates to your main fund pension. We therefore detail below the revised split of your pension and the future increases that you will receive from the Fund.

    Pre 1988 GMP £ xxx per annum No Increase from the Fund. Increase may be provided by the State and paid with your State pension.

    Post 1988 GMP £yyy per annum Increase in line with CPI up to a maximum of 3% each year. Any increase in excess of 3% will be provided and paid by the State

    Fund Excess Pension £zzz per annum In line with the (whichever index applies to your fund)

    If so, this should give you your position at SPA as far as your OPA is concerned.

    If you add together xxx and yyy and divide by 52 what figure do you come up with?

    Is it £98.82?
  • howy22
    Hi SeekTruth,

    I've not requested either of the HMR valuations, but this years appeared not long after I had queried an annual pension increase with my occupational pension provider. I'm now wondering whether my query prompted a discussion with HMR and the outcome was a revaluation downwards.

    I've spoken with HMR and DWP on at least 3 occasions but they say their figures are correct and tell me to query it with the other agency. They say they don't need to communicate with the other party as they have common IT systems !!!

    Armed with more informed information I may have another go.
  • howy22
    Hi xlophone,
    I had requested a breakdown of my occupational pension for this year and received such a statement showing Pre 88 GMP and Post 88 GMP.

    The summation of the 2 elements gives £98.82/wk.
    • xylophone
    • By xylophone 25th Apr 13, 3:53 PM
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    • 19,854 Thanks
    xylophone
    I think that you are going to have to write (recorded delivery) to DWP enclosing a copy of the HMRC letter you have recently received and requesting an explanation of the COD discrepancy.
  • howy22
    Success

    Had one final attempt with DWP after your comments. They have now admitted they are using the wrong figure and will issue a new statement.Apparently the new figure had been input by HMR back in February.

    Thank you all once more, without your advice I would probably have walked away in frustration.
    • xylophone
    • By xylophone 25th Apr 13, 6:15 PM
    • 31,962 Posts
    • 19,854 Thanks
    xylophone
    Success

    Had one final attempt with DWP after your comments. They have now admitted they are using the wrong figure and will issue a new statement.Apparently the new figure had been input by HMR back in February.
    Deep joy - as Stanley Unwin would have said....
    • joyce341
    • By joyce341 26th Apr 13, 5:50 PM
    • 57 Posts
    • 25 Thanks
    joyce341
    At last found someone else with this,I joined the contracted out scheme which Margaret thatcher brought in,then a few years ago ,about 2006 everyone in contracted out recieved a letter,saying if they wish to remain contracted out,they must write a letter stating this,if they did not,they would automaticaly be contracted back into the government scheme,I wrote saying i wished to stay in the opting out scheme,I only get a one of payment each year of £230 equal to about £4.40 pw,then i noticed that my breakdown for state pension for at least four years,say i get over £9 a week private pension,so i phoned,pension service,pension credit,inland revenue after a morning going around in circles,the inland revenue gave me this answer,if i had not opted out,i would be receiving over £9 a week and this is the figure they use in calculating my pension,not my real figure of £4,40 so lose about £5 a week which brings me below pension credit level and get about £2 just over pension credit,I am 65 this year,at least my false figure is only just over £9 not £130 something a week,how can they get away with this.
    • xylophone
    • By xylophone 26th Apr 13, 6:18 PM
    • 31,962 Posts
    • 19,854 Thanks
    xylophone
    below pension credit level and get about £2 just over pension credit,
    But ironically, being eligible for guaranteed pension credit gives you automatic entitlement to housing benefit and council tax benefit which is probably worth rather more than £4.60 a week?
    http://forums.moneysavingexpert.com/showthread.php?t=4117291&page=2 post 21
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