Question
I am 58 and have been contributing to a company pension for 34 years but have been 'contracted out' of SERPS/SP2 for over 25 years and paying a lower NI contribution. How will the value of my state pension be affected when I reach 66 years? Answer
It all depends on whether the Government's proposals to introduce a flat state pension by April 2017 go ahead (which looks likely if they remain power).
Assuming they do, then based on the information provided so far this is what will happen:
In April 2017 a calculation will be made to work out your 'foundation' amount of state pension, as follows:
(Number of pre 2017 qualifying years NI contributions / 35) * £144 - 'rebate derived amount'.
The '35' refers to the number of qualifying NI contribution years required for a full pension. The £144 is the intended flat rate weekly pension. The rebate derived amount is a deduction because you contracted out of SERPS/S2P, reflecting the fact you paid a lower NI contributions while contracted out, although the Government has so far given no indication of how this will be calculated.
If your foundation amount is less than you'd be entitled to under the current system, then it will be increased to match the latter. If your foundation amount is lower than the flat state pension of £144, you'll get 1/35th of the flat pension (£4.11) for every further qualifying year worked until you reach state pension age, the pension obviously capped at £144 overall. Your contracted out pension is unaffected, you can take this as originally intended.
Trying to put some figures to the above for your situation:
If you started work at 18, your qualifying years in April 2017 will likely be around 44 years. Divide this by 35 and multiply by £144 and we get £181 per week. We don't yet know how the rebate derived amount will be calculated, but it'll leave you in one three scenarios:
1. The end result is less than £107 a week (the current state pension), in which case £107 will be your foundation amount and this will increase by £4.11 a year until you reach state pension age at 66.
2. The result is above £107 but below £144, in which case it'll be your foundation amount, again increasing by £4.11 a year until you reach state pension age (up to a maximum £144).
3. The result is above £144 per week, in which case the excess over £144 will be 'protected' and increase with inflation each year (measured by CPI).
Note: the £144/foundation amount/£4.11 will all increase by the higher of earnings growth, inflation (CPI) or 2.5% moving forwards, but I've shown them in today's terms to keep things simple.
I am 58 and have been contributing to a company pension for 34 years but have been 'contracted out' of SERPS/SP2 for over 25 years and paying a lower NI contribution. How will the value of my state pension be affected when I reach 66 years? Answer
It all depends on whether the Government's proposals to introduce a flat state pension by April 2017 go ahead (which looks likely if they remain power).
Assuming they do, then based on the information provided so far this is what will happen:
In April 2017 a calculation will be made to work out your 'foundation' amount of state pension, as follows:
(Number of pre 2017 qualifying years NI contributions / 35) * £144 - 'rebate derived amount'.
The '35' refers to the number of qualifying NI contribution years required for a full pension. The £144 is the intended flat rate weekly pension. The rebate derived amount is a deduction because you contracted out of SERPS/S2P, reflecting the fact you paid a lower NI contributions while contracted out, although the Government has so far given no indication of how this will be calculated.
If your foundation amount is less than you'd be entitled to under the current system, then it will be increased to match the latter. If your foundation amount is lower than the flat state pension of £144, you'll get 1/35th of the flat pension (£4.11) for every further qualifying year worked until you reach state pension age, the pension obviously capped at £144 overall. Your contracted out pension is unaffected, you can take this as originally intended.
Trying to put some figures to the above for your situation:
If you started work at 18, your qualifying years in April 2017 will likely be around 44 years. Divide this by 35 and multiply by £144 and we get £181 per week. We don't yet know how the rebate derived amount will be calculated, but it'll leave you in one three scenarios:
1. The end result is less than £107 a week (the current state pension), in which case £107 will be your foundation amount and this will increase by £4.11 a year until you reach state pension age at 66.
2. The result is above £107 but below £144, in which case it'll be your foundation amount, again increasing by £4.11 a year until you reach state pension age (up to a maximum £144).
3. The result is above £144 per week, in which case the excess over £144 will be 'protected' and increase with inflation each year (measured by CPI).
Note: the £144/foundation amount/£4.11 will all increase by the higher of earnings growth, inflation (CPI) or 2.5% moving forwards, but I've shown them in today's terms to keep things simple.
Read this Q and A at http://www.candidmoney.com/askjustin/801/how-will-the-flat-state-pension-affect-me
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