Blog 4 showed how the past changes to the Additional State Pension mean that you could have built up several different parts of State Pension. Your Additional State Pension will depend on a large number of factors.
These are:
- what type of National Insurance you paid or credits you received
- which year you paid National Insurance
- how much you earned in each of those years
- which years you contracted-out
- which years you were not contracted-out
- whether and when you left your contracted-out private scheme
- how your contracted-out private pension is revalued each year
As you can see from the above list, your State Pension will be affected by your past history of contracting-out (see blog 3 which gives an introduction to contracting-out).
Depending on whether you were never contracted out, or always contracted out, or only contracted out some years but not others, the formula we use for calculating your State Pension will be different.
If you never contracted out
As we saw in the previous blog, the most straightforward would be if you have never contracted out. Then we can calculate your total State Pension by just adding up all the parts that you have built up in the old system.
Never contracted-out
State Pension = BSP + Grad + SERPS + S2P
If you were always contracted out
If you have always been contracted out of the State Pension since contracting-out first started in 1978, then you would not have built up any SERPS. You may have a little bit of S2P top-up (see blog 2 which explains this). So your State Pension could consist of:
So if you have always been contracted-out:
State Pension = BSP + Grad + S2P top up
If you have been contracted out only some of the years, but not all years
If you have been contracted out of some of the Additional State Pension in the past, but not in every year, then calculating your State Pension is more complicated. This blog helps explain how we take account of contracting out, when working out your National Insurance State Pension. Don’t forget that you could only contract out of the Additional State Pension, and not the basic State Pension.
Working out your State Pension
For each year on your past National Insurance record (unless you paid married women’s stamp) you will have built up some basic State Pension (BSP). If you have 30 years on your NI record, then you will have built up the full BSP (30/30ths). If you have 24 years on your NI record, you will have built up 24/30ths of the full amount. This part of the calculation of your State Pension is the same, irrespective of your history of contracting out.
But you are also likely to have been building up some Additional State Pension too, and as we saw in blog 4, this could be from Graduated Retirement Benefit, SERPs or S2P.
Contracted-out some years but not others
Time that you were contracted out of the State Pension system in the past will be taken into account when calculating how much Additional State Pension you have built up. There will be numerous complex calculations involved in working out your figures. So if you were contracted out part of the time:
- Your Total State Pension under the old rules =
- BSP
- + Any Graduated Retirement Benefit from years 1961-1975
- + SERPS (from time when contracted-in during years 1978-2002)
- - GMP (which is the SERPS you contracted out of during 1978-1997)
- - Protected Rights (SERPS you contracted-out of in a DC/personal pension 1978-1997)
- + S2P (from when you were contracted-in from 2002-2016)
- + S2P Top-up (from when you were contracted-out during 2002-2016)
Some people paid lower NI to the State Pension system in order to opt out of SERPS/S2P. Most people didn’t know they were paying less NI than others on same salary! You could only contract-out if you were contributing instead to a private pension to replace SERPS/S2P.
This helped people to opt out of State earnings-related pension and replace it with private sector arrangements.
If you were in a contracted-out money purchase or personal pension scheme you built up what were called “Protected Rights”.
What is a GMP?
- Contracting-out in an employer final salary-type from 1978 to 1997 will have paid for a GMP to replace SERPS for those years
- The employer scheme will pay you this GMP as part of your company pension.
- If you’re not contributing to that scheme any more, then the employer has to increase your GMP every year to protect its value
- Some employers chose to revalue GMP by fixed %.. Depending on year you left, GMP could revalue by up to 8.5%pa till your pension age
- If you’re still contributing to the employer scheme, your GMP will be revalued by earnings each year
What are protected rights?
Protected rights are pension rights gained by individuals who were contracted-out and had a defined contribution (DC) pension scheme. This applied between 1988 and 2012. The rules governing “protected rights” which required that amongst other things the member must purchase an annuity with survivor benefits ended when DC contracting out was abolished in 2012. On abolition, protected rights became ordinary scheme benefits and individuals are free to decide how they receive their DC contracted-out pension.
All this information will feed into the calculation for your State Pension and this will be taken into account for the new State Pension system in 2016. The next blogs will go on to describe how the new State Pension will be simpler in the future, and what will happen in 2016.
This section of Pensions Latest contains a series of blogs written by Baroness Ros Altmann the Minister for Pensions. They explain the existing State Pension system and how it changes with the introduction of the new State Pension for people reaching State Pension age from 6 April 2016. The blogs do not cover every circumstance and some of the descriptions used simplify what can be complex information. More detailed facts sheets can be found on gov.uk by searching for the new State Pension. We recommend that you get independent advice before making any financial decisions based on the information in the blogs. The blogs are written based on the position at October 2015.
10 comments
Comment by H. Smith posted on
I have to work four and a half years longer to receive my SP. I already have the qualifying NI contributions and am still paying NI. What compensation will I receive for the loss of four and a half years pension and accompanying benefits I would have received. I was not informed about the first age rise and was only informed of the second just before I was Sixty. This is like legalised robbery, although how legalised is it ?
Comment by DWP Pensions Latest posted on
From 1940, women’s State Pension age was five years younger than men’s, even though women tend to live longer. In 1995, legislation was introduced to remove this inequality and equalise State Pension age.Life expectancy increases and social changes required the inequality between men and women’s State Pension ages to be removed to achieve fiscal sustainability and inter-generational fairness. Since April 2010, women’s State Pension age has been gradually increasing to bring it in line with men’s (which is currently 65). This was accelerated by legislation introduced in 2011, so that equalisation is achieved by November 2018, instead of April 2020.
With the further sharp increase in the number of people expected to be living longer in retirement, the view was that the previous timetable to increase State Pension age did not go far enough in ensuring that the pensions system remains affordable and sustainable. Therefore, the date by which State Pension age reaches 66 for both men and women was brought forward to October 2020. However, the changes were timetabled so that the maximum delay that anyone would experience in claiming their State Pension was limited to 18 months, in comparison with the 1995 timetable.
The Government responded to the campaign calling for a slower timetable for Pension age increases and amended its original plans to delay equalisation by 6 months, at a cost to taxpayers of over £1 bn.
These proposals were published in November 2010 and the Pensions Bill 2011 was introduced into the House of Lords in January 2011. There was extensive coverage of the proposals in the media and the matter was debated at length in both Houses.
The DWP has written to those affected by State Pension age changes and who are due to reach State Pension age by 2026, using the address details recorded at the time. State Pension estimates (issued to individuals on request) also took the 1995 State Pension age changes into account. Therefore, State Pension estimates have been providing individuals with their most up-to-date State Pension age since 1995. The DWP also makes information on State Pension age changes, and who they affect, available on http://www.gov.uk, including the option to calculate State Pension age.
The Government is setting up an independent review of future State Pension age that will report by May 2017, taking into account trends in life expectancy and health along with wider factors, like job opportunities for older workers and the impact of any proposals on different groups (for example women and those in manual jobs). This is an important opportunity to ensure that State Pension age changes are fully considered by the Government, and based on independent analysis of the relevant evidence.
Any future changes to State Pension age will, as now, require primary legislation and be subject to the full scrutiny of Parliament.
Comment by Mary McSweeney posted on
How can contracted out deductions be taken from a state pension when a person has not received the pension that the deduction is related to and will not get the said pension until the end of July 2016 .
Comment by DWP Pensions Latest posted on
People who have been contracted-out of the State Pension under the current rules will, in the majority of cases, benefit under the new State Pension.
The current State Pension is made up of two parts: the basic State Pension; and the earnings-related additional State Pension. If you are currently or have been part of an earnings-related workplace pension (such as a final salary, career average or Defined Benefit pension), you’re likely to have been ‘contracted-out’ of the additional State Pension. Before April 2012, you could also have been contracted-out into a scheme that is not earnings-related (called a Defined Contribution or Money Purchase scheme), including a personal pension scheme.
During this time, you and your employer will have paid a lower rate of National Insurance (NI) contributions, instead investing in your workplace pension, or else a portion of your NI was paid into your personal pension.
Being contracted-out means you were opted out of the earnings-related additional State Pension. This means you will have been building little or no additional State Pension during this period, but will have been building some private (workplace or personal) pension instead of the additional State Pension that you and your employer’s NI contributions would otherwise have provided. Your private pension should include an amount of pension which will in most cases be the equivalent of the additional State Pension you would have been paid if you had not been contracted-out. Most people reaching State Pension age in the first couple of decades of the new State Pension will have been contracted-out at some point in the past.
To determine a person’s new State Pension, a ‘Starting Amount’ calculation is made. The calculation compares what their NI record as of April 2016 would provide as a State Pension under both the current State Pension rules and under the new State Pension rules. Both calculations take account of past periods of contracted-out employment. Whichever is the higher of these figures becomes their ‘Starting Amount’ for the new State Pension and will form the base on which, in most cases, they may be able to add to their State Pension under the new system in the future.
If you have been contracted-out for the majority of your working life, it is highly likely that your Starting Amount will be greater under the current State Pension rules. So that is the amount you will start with in the new State Pension system. But of course, if you have been contracted-out, your private pension scheme normally would pay a pension which is at least the same amount as the additional State Pension you would have got if you hadn’t been contracted-out. So whilst your Starting Amount may be less than the full new State Pension, you could actually have built up more than the full amount if you add your State Pension and private pension together.
Importantly, you may also be able to add to your Starting Amount after April 2016, until you reach either State Pension age, or you have reached the full weekly amount. This would happen by adding qualifying years to your NI record, for example through paying NI contributions through work or receiving NI credits. Each qualifying year will add 1/35th of the full weekly rate of new State Pension to your Starting Amount (£4.45 in 2016/17) until you reach the full amount or State Pension age.
As an example, if you have 30 years of NI contributions and have always been contracted-out, you would get a Starting Amount of £119.30 a week in April 2016. This is because the higher calculation figure is based on the old rules and you would get the equivalent of the full amount of basic State Pension. In other words, based on 2016/17 rates, no more than £36.35 a week will be deducted (£155.65 - £119.30 = £36.35) from the full rate of new State Pension if you have at least a 30 year NI record, even though the value of private pension you built whilst contracted-out could be higher than this. If you work for a further 9 years, you will reach the full amount of new State Pension (the equivalent of £155.65 a week in 2016/17) because you will have added 9 years’ worth of 1/35th of the full amount to your Starting Amount.
You can find out more about what it means to have been contracted-out of the additional State Pension at http://www.gov.uk/additional-state-pension/contracting-out
Comment by Trevor posted on
Trevor. I refer to the above:
"As an example, if you have 30 years of NI contributions and have always been contracted-out, you would get a Starting Amount of £119.30 a week in April 2016".
I have always been contracted-out since 1975 - 2016. My State Pension statement confirms that in April 2016 i will have 41 qualifying years and will get a starting amount of £118.68 a week. This figure is 62p less than the above example, and i will have paid in an additional 11 years !
In addition my pension will be Adjustment by £57.60 per week from April 2016.
In order to qualify for the full state pension i will need to pay full NI for a further 10 years making a total 51 years.
What happens to the missing 16 years of paying NI. How can this be fair.
Comment by DWP Pensions Latest posted on
The example you refer to is based on the State Pension values for 2016/17, when the full rate of basic State Pension will be £119.30 a week. If you have received a State Pension statement, this will have been based on the current 2015/16 values, with a full basic State Pension of £115.95 a week.
The current State Pension is made up of two parts: the basic State Pension; and the earnings-related additional State Pension. If you are currently or have been part of an earnings-related workplace pension (such as a final salary, career average or Defined Benefit pension), you’re likely to have been ‘contracted-out’ of the additional State Pension. Before April 2012, you could also have been contracted-out into a scheme that is not earnings-related (called a Defined Contribution or Money Purchase scheme), including a personal pension scheme.
During this time, you and your employer will have paid a lower rate of National Insurance (NI) contributions, instead investing in your workplace pension, or else a portion of your NI was paid into your personal pension.
Being contracted-out means you were opted out of the earnings-related additional State Pension. This means you will have been building little or no additional State Pension during this period, but will have been building some private (workplace or personal) pension instead of the additional State Pension that you and your employer’s NI contributions would otherwise have provided. Your private pension should include an amount of pension which will in most cases be the equivalent of the additional State Pension you would have been paid if you had not been contracted-out. Most people reaching State Pension age in the first couple of decades of the new State Pension will have been contracted-out at some point in the past.
To determine a person’s new State Pension, a ‘Starting Amount’ calculation is made. The calculation compares what their NI record as of April 2016 would provide as a State Pension under both the current State Pension rules and under the new State Pension rules. Both calculations take account of past periods of contracted-out employment. Whichever is the higher of these figures becomes their ‘Starting Amount’ for the new State Pension and will form the base on which, in most cases, they may be able to add to their State Pension under the new system in the future.
If you have been contracted-out for the majority of your working life, it is highly likely that your Starting Amount will be greater under the current State Pension rules. So that is the amount you will start with in the new State Pension system. But of course, if you have been contracted-out, your private pension scheme normally would pay a pension which is at least the same amount as the additional State Pension you would have got if you hadn’t been contracted-out. So whilst your Starting Amount may be less than the full new State Pension, you could actually have built up more than the full amount if you add your State Pension and private pension together.
Importantly, you may also be able to add to your Starting Amount after April 2016, until you reach either State Pension age, or you have reached the full weekly amount. This would happen by adding qualifying years to your NI record, for example through paying NI contributions through work or receiving NI credits. Each qualifying year will add 1/35th of the full weekly rate of new State Pension to your Starting Amount (£4.45 in 2016/17) until you reach the full amount or State Pension age.
As an example, if you have 30 years of NI contributions and have always been contracted-out, you would get a Starting Amount of £119.30 a week in April 2016. This is because the higher calculation figure is based on the old rules and you would get the equivalent of the full amount of basic State Pension. In other words, based on 2016/17 rates, no more than £36.35 a week will be deducted (£155.65 - £119.30 = £36.35) from the full rate of new State Pension if you have at least a 30 year NI record, even though the value of private pension you built whilst contracted-out could be higher than this. If you work for a further 9 years, you will reach the full amount of new State Pension (the equivalent of £155.65 a week in 2016/17) because you will have added 9 years’ worth of 1/35th of the full amount to your Starting Amount.
You can find out more about what it means to have been contracted-out of the additional State Pension at http://www.gov.uk/additional-state-pension/contracting-out
Comment by Mary posted on
Born in April 1954 Ip have not only been badly affected by the accelerated raise in the pension age from 60 to 64 and now to 65 1/2 but I have also been contracted out for most of my working life, so will not be able to claim the new State Pension amount. However we are told that for each full year, from April 16, that we pay contributions or receive credits, we will 'earn' an extra £4.45pw to be added to our starting amount until we reach the full rate of the new state pension. HOWEVER that will only apply until we reach the April before we reach state pension age. So, I'm my case I reach this in November 19 which means that I only have 3 more years to add and so will never have the opportunity, even if I were able to carry on working, to reach the full rate. However if I were a few years younger then I would have sufficient years left to improve my pension. Surely this is even further evidence of the age discrimination we are facing. To add salt to the wound if I continue to work to November 19 the months I pay contributions from April to November will not count as, my understanding is, it must be a full contribution year. Ros Altmann, can you please confirm if this is correct and explain how this can possibly be construed as 'fair'.
Comment by DWP Pensions Latest posted on
Your observations on the years of new State Pension from 2016 onwards that are available to you seem likely to be correct. However you seem to have missed the importance of the fact that when you were contracted-out, some of your National Insurance (NI) was used to build up a private pension. You may not realise you paid lower NI, but that is what being contracted-out means, and you were opted out of the earnings-related additional State Pension in order to build some private pension instead. So please don’t forget that some of your private pension was partly funded as a result of the NI rebate system. In fact, the new State Pension generally treats people who were contracted-out for many years pretty generously.
To determine your new State Pension ‘Starting Amount’ two calculations are made based on your National Insurance (NI) record as of 6 April 2016, (1) the amount of State Pension you would receive under the current State Pension rules and (2) the amount that you would receive under the new State Pension rules.
Both calculations take account of past periods when you have been contracted-out of the additional State Pension. Whichever is the higher of these figures becomes your ‘Starting Amount’ for the new State Pension.
In this way, as long as you have 10 qualifying years, your Starting Amount will be at least what you would have got in the old scheme based on your own NI record.
Your private pension scheme will normally pay a pension which is at least the same amount as the additional State Pension you would have got if you hadn’t been contracted-out. This means that whilst your Starting Amount may be less than the full amount of new State Pension, you could actually have more than the full amount if you add your State Pension and private pension together, and you may have the opportunity to continue to add to your State Pension even if you already have a 35 year NI record.
We are encouraging anyone who is age 50 or over to request a new State Pension statement. This will give you an estimate of your State Pension under the new rules, based on your current NI record. Further details can be found at http://www.gov.uk/check-state-pension.
Comment by T. P.Samuel posted on
Samuel - DOB: March 1955
I have worked in the NHS from Feb 1976 till Oct 1979. Yes i was contracted out during that period. I was given an option to apply for a return of my superannuation contributions. I took the offer with a deduction for income tax plus a certain amount deducted to secure the rights that i am entitled had i not been contracted out from 6,4.78 by virtue of my membership of NHS. In such circumstance will my starting pension be less than my 17 years of NI under the new State pensión ( 17/35 x 155.65 = 75.60). Appreciate your reply by email. Thank you very much
Comment by DWP Pensions Latest posted on
Samuel, thanks for your comment. Whilst we don’t respond to individual queries on these blogs, you can get a forecast of the State Pension you may get at State Pension age, and details of how you may be able to increase this, via our new Check your State Pension service at http://www.tax.service.gov.uk/checkmystatepension.