State pension contracted out reduction

[Issy422]

Does anyone know how the contracted out deduction is calculated?

I have a fairly good grasp of the old state pension scheme versus the new scheme and of contracting out, so don't need those explaining.

My pension forecast has always said that I will get the full new state pension, but the contracted out information has changed. It used to say that I would have had just under £40 less pension because of being contracted out, but that had been already taken into account in my forecast.

Now it links to gov.uk pages that talks about making up deductions for contracted out years by earning an extra £6.58 per week pension for every year added between now and retirement. (I misread and had a huge panic. Blaming lack of sleep and perimenopausal brain fog 🤦🏻‍♀️. I thought it was saying that I would have £6.58 deducted for every year I was contracted out 😲. In the cold light of day, I realised that can't be the case, as that would be the amount deducted if I were missing the full year's contributions, which is a relief, but I still don't understand my figures.)

I have 33 years of full contributions, 9 years since 2016 and the rest before. Only two to go to have a full pension, had I never been contracted out (although a lot longer before I hit the magic ever-moving number to get it).

I was contracted out for around 20 of those years. The forecast says that I have to gain another 4 years' full contributions to receive the full pension.

What I don't understand is this, if I have a COPE deduction of ~£40 and that reduces by £6.58 for every additional year of contributions, why does it only take 2 extra years for me to get a full pension and not 6 extra years?

Can anyone make it make sense?

I'm not sure I can make it make sense.

Years in which you were 'contracted out', ie not paying towards SERPS or various other iterations of the second state pension, do not count as full years for the post 2016 State Pension scheme.

There will be a calculation that explains that but I'm not sure I understand it!

For myself I was contracted out from 1978 until 2013 - in the Civil Service employers pension and contracted out of SERPS etc.

Frm 2015 onwards I was employed by a charity and paying full NICs.

I reach State Pension Age (SPA) in December and, based on post 2015 NICs, will get the max pension of c£230/week.

If your pension prediction shows you get the full amount at SPA I'd not worry too much about what's behind the numbers!!

It's only if there's a shortfall at SPA that you've some thinking to do.

The 35 years to reach pension doesn't apply to anyone whose contribution record started before 2016. That only applies those starting after that date. For everyone else the number of years can be anything from 29 to 50 plus as we are in transitional arrangements and will be for decades. In 2016 a calculation was done to reflect any SERPS and S2P you may have earned less any contracted out years ( your cope deduction). This gave you are starting figure which, if below the new pension, you could improve on with further national insurance contributions. If the projection says you need four more years then that's what you will need to pay to qualify for the full amount. Each year you have worked since 2016 has reduced any reduction in your pension.

Reduced the reduction? That is badly phrased!😂

I can't answer the precise question you are asking (how exactly the COPE amount is calculated) although I know the calculation is extremely complicated. However, I can tell you this, which I hope might help.

When the new State Pension was introduced on 6th April 2016, two calculations were done for everyone, one using the old state pension rules and one the new, and the higher of the two figures became your 'starting amount'.

The old rules calculation was:
( ( (NI years accumulated up to a maximum of 30) / 30 ) X old basic state pension amount ) + any SERPS or S2P earned by being contracted in

The new rules calculation was
( (NI years accumulated up to a maximum of 35 ) / 35) X new state pension amount ) - any COPE figure relating to having been contracted out.

The current old basic state pension amount is £176.45
The current new State Pension amount is £230.25
Those contacted in to SERPS / S2P paid a higher rate of NI than those contracted out, and the calculations take account of this.

For those of us who were contracted out for much of our working lives up to that point ,and therefore had quite a large Contracted Out Pension Equivalent (COPE) amount, it's likely that the starting amount was that obtained under the old rules, and thus close to the old State Pension Amount.

AS part of the new State Pension simplification, contracting in and out was done away with, and from that point every NI year accumulated after that simply adds 1/35th of the new State Pension amount (currently £6.58) to that starting amount, until either the maximum new State Pension amount is reached or the person reaches State Pension Age, which ever is sooner.

The COPE figure was only used in that initial calculation of your starting amount - it will NOT get deducted from your headline pension forecast amount and in itself has no further significance from that point.

The consequence of the two calculations is that those who were contracted out, and so had little or no SERPS / S2P and a large COPE amount but had at least NI 30 years as at 2016 will have ended up with a starting amount of around £176.45 in todays figures, even if they had over 30 NI years at that point - but if they have continued to accumulate NI years since they they will have reached the maximum new State Pension amount by now.

@Issy422 I am not sure what you are referring to.

I know you say you understand the old and new pension schemes but I’m going to start there.

Contracting out stopped for everyone from 6 April 2016. On 5 April 2016 DWP worked out your pension under the old scheme, this became your starting point for the new state pension. For each year of full NI contributions from 6 April 2016 you earn 1/35th of the new rate of state pension. As the state pension increases each year the maximum amount and the amount per qualifying year increases.

From 6 April 2025 the full new state pension is £230.25 so when divided by 35 = £6.58, which is what you earn for each qualifying year post April 2016. It appears you only need 2 more qualifying years (2025/26 and 2026/27) to get the full new state pension.

The fact you have a COPE figure means prior to 2016 at some point you were contracted out. Most people don’t realise that they were contracted out. To be contracted out your employers pension scheme had to guarantee you would get a pension at least the same as that you would have got from the Additional State pension.

If you COPE figure is £40.00 per week this is the minimum you must get from the employers pension scheme you were in. Most public sector and bigger employers were contracted out of the Additional Pension.

HTH

Thanks @Brahumbug . I thought it was 35 years for everyone retiring after April 2016, but if not that would explain it. I already have 33 and need another 4, so I must need 37.

I would really like to fully understand it, as it does panic me every now and again that I've misunderstood, especially the other night when I had visions of being well down on my expected amount, but those calculations don't seem to be published.

Thanks to everyone else too for taking the time to comment. I was involved in communicating the change to employees back in 2016, so I did understand the general change. I just didn't understand where the four year figure came from.

It doesn’t work like that forget the 35 years or 37 years etc. if you have pre 2016 qualifying years.

There is a FB group called state pensions. UK
They are excellent at answering any questions you might have

if it says 4 years then as long as you pay NI or receive a qualifying benefit for 4 years between now and state retirement you will get the full New state pension. Currently £230 a week.
The contracted out part was for the 2nd state pension so won't have an impact in the amount of new state pension you get. The COPE amount is an estimate of what your private / workplace pension should pay you as you would have been paying into that instead of the second state pension.

Can't post much right now so will come back later, but I get it now. Thank you everyone.

Thank you everyone, especially @P00hsticks, your explanation really helps. I obviously understood it better back in 2016, because I have my starting amount calculated in my pensions spreadsheet. I just didn't have the 'what happens next in', which is obvious now that you've said it.

I've seen a lot of comments online about the state pension forecast being wrong if contracted out, but I finally understand where the figures on the state pension forecast website come from, so feel reassured. Calculations now in my pensions spreadsheet with explanation, so I don't panic all over again in a few years when I've forgotten again 😂.