Pensions info for people who were contracted out

[itsybitsy]

I am fully paid up with NI (my maximum was 30 years).

[Jeffjones297]

Anyone who has or is near drawing a pension, it's worth getting independent pension advice.
The number of mistakes which are made on private, public sector and old age pensions are numerous.
£500 for an expert to go through the figures and contents any mistakes, could save you £ thousands.
In my experience, they rarely, if ever make the mistakes in your favour !
I was in public sector employment and normal employment from 15 1/2 to 58 a total of of 42 yrs. No unemployment, no benefit entitlement, yet ! I don't get a full old age pension ? Why ? Mine is about £50 less than a full one, considerably less, if I was entitled to pension credit.
I've never claimed for anything and worked my whole life.
My public sector pension, after working out was ok, then two yrs later, "oh we made a mistake, you're lump sum should've been more" no explanation on why, how they calculated it and how I could check on it ?

My mate had the same problem, no explanation, no calculation, just two figures, your lump sum and your monthly pension.

If this is you, check it, get independent advice and don't take no for an answer.

[jennyjj01]

A year's contribution is £800. This buys you a pension of £275 a year.
The max you can get is about £185 a week. Some people will get topped up due to hardship I think.
More info here
https://www.moneysavingexpert.com/lates ... on#pension
This is where you check what you're going to get, wheter you can top up etc
https://www.tax.service.gov.uk/check-yo ... on/account

The weird thing is, my last 6 years are full years and my forecast says I need to pay for 2 more years (taking me to 44 full years). Well, 1 year takes me to next April, so the other year seems to contradict the article.

It gets worse. Your scheme pension might drop by the "State Pension Offset" when your state pension starts. Check your scheme.

This post just became more topical for me as I recently became eligible for State pension. I was already drawing a company pension which had had me 'contracted out' of SERPS for a few decades. My company pension was above the tax free threshold, so I pay some tax.

Very fortunately, I'd kept abreast of my pension estimate.

Here in a nutshell are some realities which faced me and might face you if you were contracted out. (Gov scheme or one of the major nationalised industries.)

To get full state pension, you need ( about ) 35 'contributing' years. I had over 40 contributing years which the .gov.uk site marked as 'fully paid' BUT until recently, I was still 4 years short and in line to get a pension reduced by over £20 per week. (Current max is £230.25 per week)

I got in 2 more years by working a low wage part time job. I was actually earning too little to actually pay NI, but because I earned over the lower earnings level, every week contributed. I.e. 2 years of NOT paying a penny NI counted as two extra qualifying years.

I BOUGHT one year's top up for about £750.

That left me in line to get state pension reduced by £2.92 to £227.33

Now..... Continuing to work to April was my plan, to get in one final year, but dammit, no contributions count from your pension eligibility date. I.e. Working to April wouldn't help. My main option to get that extra 2.92 would be to buy a year at cost of about £850.

Now, the £2.92 would be taxed because I'm a tax payer on my company scheme, so would only be worth £2.33. I decided NOT to pay £850 for that privilege, though I have the right to still top up and get a reconsideration until at least April 2026.

I could increase my state pension by deferring it, but it's a bad deal. It costs 9 weeks of deferred pension to buy an increase of 1% That's roughly £2000 cost to get an extra £2.30 a week, which will be worth £1.84 a week after tax. It would take longevity of over 1000 weeks to cost in.

Effect on my existing (and paying out) company scheme: On reaching state pension age, it immediately dropped by the 'state pension offset' of about £28 Net.

Effect on my existing and paying out company scheme for tax - DRAMATIC!: From when I draw the state pension till 5 April, I'll receive about 7,300 in state pension. So I'll owe 1,460 in tax on that, and they will want to tax my company scheme by an extra £243 per month till April. They have therefore WIPED out my tax free allowance on my company pension! On which I will now pick up £230 less per month. That's on top of the £28 that I lost for the offset.

End result : Collect a new £985 pcm state pension. Lose £28+230=£258 pcm from company pension.

I'll edit this post if my Oct Pension payslip reveals any errors.

Come April, I'll actually have a small tax debt of a few £


* I've rounded/fudged a few numbers to conceal some private affairs.

The moral of this tale....... FFS check your future retirement income and tax implications well before reaching retirement age.
Especially if you worked for the government or one of the nationalised industries.

If/when HMRC freeze tax free allowances and as the state pension increases to exceed it, the gov are going to have to find a way to collect the tax that pensioners owe. It will be messy.

[pseudonym]

Jenny, first of all well done on keeping on top of your potential pension earnings. Wise move.

I am in a similar boat, Military pension and retired very early, falling short of "required years" but decided not to buy anymore due to tax reasons.

I have a decade to decide whether to purchase more years or if the State pension will still be around.

[jennyjj01]

Jenny, first of all well done on keeping on top of your potential pension earnings. Wise move.

I am in a similar boat, Military pension and retired very early, falling short of "required years" but decided not to buy anymore due to tax reasons.

I have a decade to decide whether to purchase more years or if the State pension will still be around.

I get you on the tax reasons: Gotta note that we buy top ups out of money we already pay tax on, but then get taxed on the extra pension it buys.

I've had, and still have colleagues in their 40s and 50s who blindly stumble onward, maybe paying the minimum into company pensions without saving for retirement. I try to tell them that the so called company pension might be enough to buy a happy meal a week when they draw it and that they'll be at the mercy of government means tested benefits. (OK I exaggerate)
Its scary reaching retirement with no way of boosting income while watching the value of lifetime savings evaporate. It was the Liz Truss event that brought me close to tears.

Getting my part time job for two years was my way of topping up

Retirement planning has to be the ultimate prep, short of buying a funeral plan

[GeraldTheBonzai]

Topical for me. Handed in my notice week last Monday and retire at Xmas. Currently going through all the financial prepping. Or rather activating all the prepping i've been doing over the years.

[Frnc]

Retirement planning has to be the ultimate prep...

For sure. I was lucky I found out about this, so I was able to buy about 7 extra years to cancel out most of my contracted out deduction. I should now get about 98% of the maximum. The final year would only have bought about a third of other years, so I didn't bother.

Ironically I'll be paying more tax than when I had lodgers. Although that doesn't include the capital gains if I sell my house.

I have two company pensions. The bigger one goes up 3% a year, so is ok as long as inflation doesn't get high. The smaller one doesn't go up once you take it. This was a government scheme that rescued a failing company pension. I took it a few years ago, so it gradually decreases in real terms value.

I suppose my emergency safety net is that I could always go back to having a lodger or two.

[ForgeCorvus]

I can't help but wonder if I'd do better not increasing my company pension (already paying extra) and buying Sovs with the extra.... No CGT on them

[jennyjj01]

I can't help but wonder if I'd do better not increasing my company pension (already paying extra) and buying Sovs with the extra

The cost effectiveness of buying top up years or gaining by deferring can be evaluated. E.g. Top up costing £800 ( approx ) buys you an extra (up to) £6.58 per week. Taxed, that's £274 a year. So, you need to survive at least 3 and a bit years for it to cost in. It probably would cost in for most of us.
Top ups can cost far less if you already had some contributing weeks.
Buying sovs is at the whim of what happes with gold prices.

Increasing company pension contributions , if an option, is a cost effective option as you will get a tax-man top up ( extra 25%) going in and a 25% tax free exit when drawing down. Plus you save NI if you divert your salary into the company scheme.

[Frnc]

Top ups can cost far less if you already had some contributing weeks.

I think you can only do that for certain years, eg the last 6. You need to make sure you're not buying a year that doesn't actually increase your pension. I don't know whether they'd bother to stop you wasting money.

3 years is correct. If you live 3 years past your pension age, all these extra years bought have paid for themselves and you start making a profit.