Puzzling pensions! Don’t get caught out
We had a chat with one of our in-house pension pundits, Abi Thomas, to talk all things State Pension, being ‘contracted out’ and not ending up with what you envisaged in retirement…
Is it not just as simple as paying your national insurance (NI) contributions Abi?
Unfortunately not, we’ve worked with a number of clients recently who have paid NI for 35 years and aren’t entitled to the full state pension. This can come as a bit of a surprise and it’s all to do with changes made to the State Pension system over the years.
Can you tell us a bit more about why someone wouldn’t be entitled?
Sometimes people have been ‘contracted out’, which means they would’ve paid lower NI contributions.
Under this option (which no longer exists) the extra cash would’ve been paid into their workplace or personal pension scheme.
The years an employee spent ‘contracted out’ don’t count as ‘full’ qualifying years to reach the 35 years needed for the full State Pension of £175.20 per week.
Additionally, changes were made to the State Pension in 2016, so the old system applies to those who reached State Pension age before 6 April 2016. Those who reach their State Pension age on or after that date are in the new system – many people will have NI credits in both systems.
How can you find out more about your personal situation?
Get a State Pension forecast online here or by calling the Future Pension Centre.
If your State Pension is lower due to being ‘contracted out’, it will appear on your pension forecast as COPE – contracted out pension equivalent.
Schemes no longer contract out their members, this stopped for defined contribution schemes in 2012 and in 2016 for defined benefit schemes.
Does it really matter if the money is going into a private pension anyway?
Contracting out from the State Earnings Related Pension (SERPS) or State Second Pension (S2P) started at a time when average investment returns were much higher (in the 1980s). The idea was that if you invested the extra cash having paid lower NICs, you might get more money in the long run.
Whilst being ‘contracted out’ can give your private pension a boost, it’s often the case that the amount is less than the state pension given up. This largely depends on the pension scheme and investment performance over the years.
Everyone’s circumstances will be different.
What should those affected do about it?
If you discover you have years that are not deemed as ‘full’, then you can buy ‘extra’ pension years. This could lead to an increase in your State Pension.
This is done by making voluntary class 3 NI contributions.
What about the changes you mentioned in 2016?
Those who have reached the State Pension age on the old system can sometimes buy up to six missing years. The deadline is six years after you reach State Pension age.
Those reaching State Pension age in the new system will have a ‘starting amount’ based on their NI credits at 6 April 2016 and then if they’re still working, they will build further credits. But if not, they may be able to top up, again by paying class 3 NICs.
What action do you advise people to take now?
Get your State Pension Forecast! You can then find out if you can improve your State Pension amount.
Just because you can make top up payments doesn’t necessarily mean that you should, it’s something to decide based on your individual circumstances. And you need to be sure that it will improve your circumstances in retirement.
For example, you’ll have a ‘Personal Maximum’ on your forecast. This is the maximum State Pension you can get if all your gaps are filled and all the years after 6 April 2016 counted towards your State Pension.
If you have a number of years to go before your State Pension age you might make it up to the maximum without paying for top ups.
I always advise folks to ask these questions when they deal with the Future Pension Centre “how much will it cost me?” and “will this definitely improve my State Pension amount?”
Get in touch with your usual CPW team members if you have any questions or concerns about this. Or you can book a call with us by clicking here.
This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action.