Effect on new state pension of contracted out periods

Effect on new state pension of contracted out...

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Yes, my posts are indeed like buses ... so here is the second in quick succession!

I know we don't advise on pensions etc. but I suspect that the subject is raised by clients quite often so we probably should know more than the lay person does. I was quite surprised, therefore, in reading an article written by a pensions adviser in the Sunday Times of the effect that periods contracted out of SERPS will have on the new single tier pension. The writer (who does advise people!) had like me, assumed that contracted out years would simply not count towards the 35 years required for full entitlement. So .. I should get 40 years in by age 60, 10 of which were contracted out ...so I get 30/35 x Flat rate. I had understood and accepted that.

This is not the case. A deduction is made "that is broadly equivalent in value to the workplace pension that the rebate funded". I am not sure how the calculation is made but in the case of the Times' correspondent she suffered a £42 week deduction for a 7 year contracted out period right at the start of her career when she was earning next to nothing. This despite the fact she was forecast to have 47 years of employment by retirement.

I would be interested if anyone better qualified has a view on this as it may enable us to steer similarly complacent clients to an IFA (or at least towards getting a pension forecast) at at earlier stage.

Thanks.

 
 
 
 

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paddle steamer
By DJKL
30th Jun 2015 10:46

Calculation ?

I am not sure why you/ the other party would think the contracted out years would not count, after all they did purchase the basic state pension so have to be brought in re that element of the new regime. There is a logic in reducing the new pension  by a formula based on number of years contracted out as during these years funds went in to one's contracted out pension. The key is the clawback formula.

Insofar as I can find, post a quick search on google, the upper  amount is estimated as circa  £155 and this can reduce to  circa £118 (both forward figures), so say £37 per week reduction or £1,924 per year is the maximun deduction. (Could well be wrong with these)

To an extent the key is therefore what benefits/funds you got from contracting out and what does this currently provide?

In my case it is all in my SIPP via the route of Standard Life with profits, actuarial adjustment when leaving same, switch to units and then switch to lowish cost SIPP provider when protected rights were permitted into same.It is tricky to know exactly as my SIPP merged the two parts (protected and non protected rights ) some time ago, but back of a fag packet suggests my  protected rights part (from 1988 to when the rebates stopped) is currently churning out about 2.5 times in dividends the max foregone above (If that is the max foregone)

As I have just under 11 years to go for State pension I expect that by time I draw same the SERPS  etc rebates in  the SIPP will churn nearer 3.5 times foregone max (if it is the max foregone)

I will now go and try a friendly broker to see if he has some publications re SERPS/S2P adjustments better than the comments I have found on the net, anyone got anything firmer re the calculations?

 

 

 

 

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