Pulaski

I was contracted out for 12 years, pretty much my entire career in the UK, apart from the years when I worked during the summer when I was a student, but earned enough during as little as 13-14 weeks (three years) to be credited with whole qualifying years for NI purposes.

I can only assume that during my 12 "career" years, despite being contracted out, I was considered to be "low paid". For two years, maybe three, I certainly was low paid, but the last four years I thought I was pretty well paid.

So how I came to get full credit for literally every year I worked: the student part-years, the contracted out low paid years, and the contracted out later years when my pay was higher, is still something of a mystery to me, though also a pleasant surprise.

Glasgow Girl

The state pension calculation for anyone with pre 2016 NI years is complicated. All full NI years will count towards the pension calculation regardless of salary. Years that were contracted in at a salary above a certain amount will result in a supplement to the maximum pension. Conversely all contracted out pre 2016 years will result in a deduction to the maximum pension. Therefore someone with 30 pre 2016 contracted in years at a salary above a specified amount may reach todays maximum pension without requiring any additional years and in fact will not benefit from any additional voluntary years, while someone else with 35 pre 2016 years of contributions that included some contracted out years will fail to reach todays maximum pension, unless they had enough contracted in years at a higher salary to balance that out. It’s complicated, and the only thing you can be sure of is that all post 2016 years will add £6.32 to your current pension forecast until the maximum is reached. You have to trust the pension forecast provided as there is no way to do it yourself.

Adding pre 2016 years to increase your pension is very situational dependent but that door is closing fast.

00derek

no, I didn't have SERPS

Glasgow Girl

What makes you think you did not earn any SERPS or S2P supplements. Unless you contracted out all of your working years, I think you were automatically entitled to a supplement if you earned enough, and under certain conditions you could earn S2P supplements regardless of salary. But either way you need to trust the state pension forecast,

tdrinker

My take is the civil service makes the rules highly complex as a jobs creation tool. Either that, or these complicated rules were created by people with the high intelligence to understand them, but lacking the common sense to make them simple. The result is mass confusion and an enormous bottleneck in processing claims. I wonder whether the revenue raised by some people exceeding 35 years' NI contributions outweighs the extra administrative costs incurred.

The pre-2016 complication will disappear in time and the pension rules will be straight forward. Unless they're changed again.

Pulaski

The problem with any tax or tax-like calculations is that each year is potentially a stand-alone calculation, and that any accumulated amount payable or receivable as of today is not a single calculation but is the sum of as many single year calculations as apply to the tax payer. Even when the rules are stable over several years, the amount of tax paid/ contributions made/ amounts above or below any specified threshold or ceiling, will vary year on year.

To GG's assertion that "there is no way to do it yourself", I think you probably could, but it would require a set of spreadsheets, one per year, and to apply the rules for each year to your income and NI for that year.

So it might not technically be "impossible", but it is certainly wildly impractical for most people to even consider. I also doubt that most people have the raw data, primarily pay slips, from decades ago, to perform the calculation even they wanted to attempt the calculation.

tdrinker

So why have a calculation? Either forget the contracted out deduction or make it a flat amount, £5, £10 or whatever, per year contracted out. 80/20 rule, it's nearly as accurate and removes the vast amount of complex, time consuming, administratively expensive calculations that were undertaken.

Pulaski

I'm not going to disagree, and 60+ years ago, that is what would likely have happened, but computerization made huge numbers of precise, but not necessarily useful, calculations a practical reality, so here we are.

Glasgow Girl

The reason it’s complex is to be fair to all concerned. The supplement earned through SERPS and/or S2P can be in excess of £200 per week or could be very little, the deduction for contracting out can also be in the same ball park. It is earnings based and varies widely so they realistically cannot just ball park it. Those calculations are complex and have changed several times since the 70s, so you need to apply several sets of complex rules to your entire earnings history plus any credited years. Even if you had the rules for each time period and the data required, good luck convincing those in charge that they got it wrong. So, realistically you have to accept what they say.

Today, the pension is calculated as the higher of what was earned prior to 2016 which includes SERPS/S2P supplements minus any contracted out deductions; or if that amount is less than todays maximum then it is calculated as what was earned by 2016 plus £6.32 for all post 2016 years minus any contracted out amount, or the number of years of contributions multiplied by £6.32 less any contracted out amount (whichever is higher). The key point is that the supplements are applied to the 2016 calculation but not the post 2106 calculation, whilst the deduction is applied to both.

Because of SERPS/S2P higher earners may have built up a pre 2016 pension in excess of todays maximum without the 35 years required for the post 2016 calculation, and those people will almost always receive a pension in excess of todays maximum with less than 35 years contributions. Everyone else will have their pension calculated as above. Some of those may only need a small amount to top up the pre 2016 pension to today’s maximum and will need somewhere between 30 and 35 years contributions depending upon the gap. Those with a bigger gap will need 35 years to reach the maximum pension because then the new calculation will exceed the amount earned prior to 2016 and that amount will apply. If you were contracted out prior to 2016 then you will need more than 35 years because the deduction will be applied to the post 2016 calculation. The good news is that you can claw back that amount with each additional years contribution.

They did the right thing changing the law to make the post 2016 calculation simple, but cannot change the past and need to be fair to all since it can make a significant difference to your pension. Applying the deduction to today’s calculation seems unfair on the surface but it is designed to ensure that those who contracted out do not benefit unfairly. In reality though because you can make up that shortfall by continuing to contribute since 2016, those who contracted out and continue voluntary contributions until the maximum pension is reached come out well ahead if the rebates for contracting out were invested well.

It would be nice if they would identify your pre and post 2016 basic pension based solely upon the number of years of contributing. Then identified the SERPS and S2P supplement, and the contracted out deduction because that would help people understand better. They do identify the deduction on the forecast but nothing else. However if they did put forward a full set of figures I suspect the amount of queries on the calculation would go through the roof, and since it is very complicated much time would be spent explaining the system to many that will never grasp it. I have a decent understanding of how they do it, but still get mixed up at times because it is so convoluted and there are many caveats and nuances. I would have made the same decision they made in the interest of resource management.

tdrinker

It was a choice to make the process so complicated, not a necessity. They could have avoided the confusion, delays and administrative cost by taking a step back and realising that a major reason for the new pension is simplicity, and extending this to the transitional arrangements.

There’re many aspects that can be challenged on fairness – class 2 vs. class 3, frozen pensions, working people continue to pay NI beyond 35 years’ contributions but pensioners (even if working) don’t pay NI, and so on. This doesn’t justify an additional unfairness (whataboutery), but it’s minor all things considered. And inevitably, there will be calculation errors that are uncheckable, therefore uncorrected (also unfair).

One we'll have to disagree on.

Pulaski

Given that NI, for everyone employed or self-employed, is largely a percentage of their gross earned income, (subject to a cap with, historically 0%, or now a reduced amount above the cap), but the state pension is, for most people, a fixed amount irrespective of the amounts contributed over their working career, and not least because most people (those working in the UK) are forced to continue contributing even if they have already reached the 35 years for a full pension, there is very little that is "fair" about the UK state pension. 🙄

tdrinker

Sunak's talking about abolishing NI over the course of the next parliament if he's re-elected (which he won't be). I don't think he's explained what the criteria would be for a state pension, or other benefits that are currently dependent on NI payments. Or how the missing NI receipts are covered.

Given the uncertainty, it's another reason to backfill missing NI years if eligible rather than planning to contribute in future.

00derek

Because I have no memory of them from when I was working in the UK?
I did contribute to a private pension from 1994-2000.

Pulaski

If you earned above the SERPS threshold, SERPS would have been the default for you without you doing anything, signing anything, or requesting anything.

SERPS is entirely unconnected to any private pension that you might have contributed to unless you "opted out" of SERPS (which you likely would remember), when a percentage of your NI would have been directed into a standalone private pension, with certain strings attached, to reflect that that money had restrictions reflecting its funding source from the NI system.

So my guess is that there is a SERPS component to your state pension calculation, despite you not being aware of.

Glasgow Girl

Prior to the early 2000’s SERPS was earned if you paid NI on a UK salary that was higher than average earnings (a level that varied each year and was not particularly high) and were not contracted out. It was automatic, you never had to do anything to opt in and most were unaware of the fact that they were building up a SERPS entitlement. If you qualify for the maximum state pension without working the full 35 years it’s safe to say that you did earn SERPs. They won’t notify you if that on any forecast.