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State Pension

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Well it’s mid April and most of us will (soon) have paid our first month's extra NI contributions. So I thought I’d take five minutes to explain the new State Pension, how it works, give some examples with varying degrees of service as to what we’ll get out of it, and whether it’s worth it. People where I work simply don’t understand it and just think they are paying £40 a month extra for nothing. The press don’t help as they don’t understand it either and keep putting out stories, hyperbole and myths which are just plain wrong, confusing and sometimes quite depressing.

 

It’s quite a long post, my apologies for this but I wanted to explain it as simply as I could. Even so it’s a very complex scheme, so feel free to ask me anything, or better still go online and request a State pension forecast. You need your NI number, mobile phone and a passport.

 

Some facts about the State Pension (skip this if you are ‘au fait’ with how it works):

 

1.     Prior to April 2016, there were two types of State pension. The basic State pension and Additional State Pension (previously called SERPS or S2P). These were accrued by paying National Insurance contributions.  Everyone, as long as they earned over a certain amount, accrued basic State Pension. 

 

2.     The system was designed such that those people, who didn’t have a company pension scheme, paid slightly higher NI contributions (they were known as ‘Contracted In’) and in return they accrued Additional State Pension (SERPS or S2P).

 

3.     Those people in company pension schemes, such as the Police, didn’t need this extra pension so they didn’t accrue it, but they didn’t have to pay for it either and consequently paid less NI contributions. 1.4% less to be exact. They were known as ‘Contracted out’. This perfectly normal and they will have had no choice in the matter.

 

4.     To achieve the maximum basic State Pension, one needed to accrue 30 years worth of NI contributions (it wasn’t always this, but this figure was the latest, prior to April 2016). The basic State Pension was, at last count, about £120 a week.

 

However in an effort to simplify the State pension the Govt changed the rules and brought in a single new State pension to the value of £155 a week. Sadly it was badly marketed, as firstly, not everyone would get that and secondly some people worked out that they’d get less than what they might have got under the old system – this clearly wasn’t the case.

 

The way it works is simple (in theory).

 

Firstly, whatever you have accrued under the old system stays with you – you don’t lose it. This is called the ‘Starting Amount’. It’s worked out in one of two ways:

 

1.     number of years NI Contribs/30 x £120  plus any additional pension (SERPS/S2P).

2.     number of years NI Contribs/35 x £155  minus the Contracted out deduction.

 

The higher of these two figures is taken for the starting amount. It sounds complicated but essentially, if you have been contracted out for any reasonable length of time, then 1. is usually the highest.

 

Secondly, there is no more ‘Contracted Out’ or ‘Contracted In’. Everyone pays the same amount, so the first effect is that we pay 1.4% more NI contributions than we did.

 

Thirdly, the basic premise behind the new system is that 35 years of NI contributions are needed to achieve maximum State Pension (£155 p/w). Therefore every year of NI contributions up to State Pension Age (SPA), from April 6th 2016, accrues 1/35 x £155 p/w - about £4-40 pension p/w. 

 

1. So our first example is a new recruit, aged 23 say, and due to do 37 years service in the police (or any other employment that earns over the threshold for NI contributions). After 35 years NI Contribs he will have achieved the maximum £155 p/w. Any further NI contributions will not add to this, but he still has to carrying on paying so long as he is working, to pay for the NHS etc. That’s always been the case. So he will achieve the maximum at aged 58. If he worked prior to joining the Police then he will have a Starting Amount and so this age will be reduced and he will achieve the maximum quicker.

 

2. The second example is someone who is 33, say. He has 10 years service, all of which has been contracted out. He will thus have a Starting Amount of 10/30 x £120 p/w – so £40 p/w. He has £155 to achieve, minus £40 that he has already accrued = £115 to make up to the maximum. Every year onwards from April 2016 adds £4-40 p/w to the figure, so in 26 years he will have achieved the maximum £155 p/w; he will be 59. If he worked prior to the police then he will achieve £155 earlier as he’ll have a higher Starting Amount.

 

3. Third example, 43 years old, 20 years service, contracted out. Starting Amount 20/30 x £120 = £80 p/w. £155 - £80 = £75 to make up. Divided by £4-40 = 17 years, so he’ll be 60. Again if he worked prior to the police then he will achieve £155 earlier as he’ll have a higher Starting Amount.

 

4. Fourth example, 53 years old, 30 years service, contracted out. Starting Amount 30/30 x £120 = £120 p/w. £155 - £120 = £35 to make up. Divided by £4-40 = 8 years, so he’ll be 61.  Again if he worked prior to the police then he will achieve £155 earlier as he’ll have a higher Starting Amount. Obviously someone with 30 years service now is likely to be retiring, so will either need to continue to work elsewhere, or else pay voluntary NI contribs for 8 years of about £733 per year.

 

It's important to note that for every full year worked prior to the Police, he will have accrued 1/30 x £120 (£4 p/w) to add to the Starting Amount. 

 

So, the $64 million question - is it worth it?

 

Well at £40 extra NI contribs a month (£480 per year), in example 2 (10 years service) he will pay that for 27 years. That equates to £13K. However for that extra payment he accrues an extra £35 p/w State Pension, which is £1820 a year. The average length that people claim a State pension for is 21 years so giving a total of £38K for a £13k outlay.

 

In example 3 (20 years service) he will have paid the £480 per year for 17 years which is £8K. He still gets the same £35 p/w so the extra £38K in total but only for an £8K outlay.

 

Example 4 the outlay is only £3.8K for £38K, the proviso being that he continues to work after leaving the police.

 

The answer is quite simply, yes. The extra £40 NI we pay every month represents an extremely good deal, demonstrated above. It provides a real benefit and is not a ‘waste’ as some people at my work seem to suggest. Contrary to the new Police 2015 pension, we are paying extra but actually getting something out of it. Everyone will benefit. You don’t need to be a rocket scientist to be able to work out that if you have been contracted out for a long period of time (and thus paid 1.4% less NI contribs), but still have enough time to achieve the maximum £155 amount, then you have done pretty well and are one of the winners under the new State Pension.

 

However everyone should be able to achieve that maximum £155 as long as they have sufficient years left until SPA. Prior to the new system coming in, the maximum we could accrue was £120 p/w.

 

Once again apologies for the essay; it’s a complex subject. I do urge people to go online and get a forecast, it’s pretty simple and gives you a guide, shows you your starting amount, number of years contributions, the maximum you can achieve etc.

 

https://www.gov.uk/check-state-pension

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Thanks CP - I'd completely forgotten about state pension..............thankfully the page you've given is quite easy to go through from scratch (as long as you can prove who you are!) and it's told me that I'll get the whole amount when I'm 67.............unless they change it before then of course.....

 

All I have to do is live until I'm 67 for starters...........and hopefully I'll see 90 come and go. :)

 

Thanks again - everybody should be checking that page........

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CP, you have found a new job for when you retire!, rewriting gobbledegook from UKgov. By my reckoning with 38 years at the serps rate I will only have to work just over a years for the full pension, unless they change it again.

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Well it’s mid April and most of us will (soon) have paid our first month's extra NI contributions. So I thought I’d take five minutes to explain the new State Pension, how it works, give some examples with varying degrees of service as to what we’ll get out of it, and whether it’s worth it. People where I work simply don’t understand it and just think they are paying £40 a month extra for nothing. The press don’t help as they don’t understand it either and keep putting out stories, hyperbole and myths which are just plain wrong, confusing and sometimes quite depressing.

 

It’s quite a long post, my apologies for this but I wanted to explain it as simply as I could. Even so it’s a very complex scheme, so feel free to ask me anything, or better still go online and request a State pension forecast. You need your NI number, mobile phone and a passport.

 

Some facts about the State Pension (skip this if you are ‘au fait’ with how it works):

 

1.     Prior to April 2016, there were two types of State pension. The basic State pension and Additional State Pension (previously called SERPS or S2P). These were accrued by paying National Insurance contributions.  Everyone, as long as they earned over a certain amount, accrued basic State Pension. 

 

2.     The system was designed such that those people, who didn’t have a company pension scheme, paid slightly higher NI contributions (they were known as ‘Contracted In’) and in return they accrued Additional State Pension (SERPS or S2P).

 

3.     Those people in company pension schemes, such as the Police, didn’t need this extra pension so they didn’t accrue it, but they didn’t have to pay for it either and consequently paid less NI contributions. 1.4% less to be exact. They were known as ‘Contracted out’. This perfectly normal and they will have had no choice in the matter.

 

4.     To achieve the maximum basic State Pension, one needed to accrue 30 years worth of NI contributions (it wasn’t always this, but this figure was the latest, prior to April 2016). The basic State Pension was, at last count, about £120 a week.

 

However in an effort to simplify the State pension the Govt changed the rules and brought in a single new State pension to the value of £155 a week. Sadly it was badly marketed, as firstly, not everyone would get that and secondly some people worked out that they’d get less than what they might have got under the old system – this clearly wasn’t the case.

 

The way it works is simple (in theory).

 

Firstly, whatever you have accrued under the old system stays with you – you don’t lose it. This is called the ‘Starting Amount’. It’s worked out in one of two ways:

 

1.     number of years NI Contribs/30 x £120  plus any additional pension (SERPS/S2P).

2.     number of years NI Contribs/35 x £155  minus the Contracted out deduction.

 

The higher of these two figures is taken for the starting amount. It sounds complicated but essentially, if you have been contracted out for any reasonable length of time, then 1. is usually the highest.

 

Secondly, there is no more ‘Contracted Out’ or ‘Contracted In’. Everyone pays the same amount, so the first effect is that we pay 1.4% more NI contributions than we did.

 

Thirdly, the basic premise behind the new system is that 35 years of NI contributions are needed to achieve maximum State Pension (£155 p/w). Therefore every year of NI contributions up to State Pension Age (SPA), from April 6th 2016, accrues 1/35 x £155 p/w - about £4-40 pension p/w. 

 

1. So our first example is a new recruit, aged 23 say, and due to do 37 years service in the police (or any other employment that earns over the threshold for NI contributions). After 35 years NI Contribs he will have achieved the maximum £155 p/w. Any further NI contributions will not add to this, but he still has to carrying on paying so long as he is working, to pay for the NHS etc. That’s always been the case. So he will achieve the maximum at aged 58. If he worked prior to joining the Police then he will have a Starting Amount and so this age will be reduced and he will achieve the maximum quicker.

 

2. The second example is someone who is 33, say. He has 10 years service, all of which has been contracted out. He will thus have a Starting Amount of 10/30 x £120 p/w – so £40 p/w. He has £155 to achieve, minus £40 that he has already accrued = £115 to make up to the maximum. Every year onwards from April 2016 adds £4-40 p/w to the figure, so in 26 years he will have achieved the maximum £155 p/w; he will be 59. If he worked prior to the police then he will achieve £155 earlier as he’ll have a higher Starting Amount.

 

3. Third example, 43 years old, 20 years service, contracted out. Starting Amount 20/30 x £120 = £80 p/w. £155 - £80 = £75 to make up. Divided by £4-40 = 17 years, so he’ll be 60. Again if he worked prior to the police then he will achieve £155 earlier as he’ll have a higher Starting Amount.

 

4. Fourth example, 53 years old, 30 years service, contracted out. Starting Amount 30/30 x £120 = £120 p/w. £155 - £120 = £35 to make up. Divided by £4-40 = 8 years, so he’ll be 61.  Again if he worked prior to the police then he will achieve £155 earlier as he’ll have a higher Starting Amount. Obviously someone with 30 years service now is likely to be retiring, so will either need to continue to work elsewhere, or else pay voluntary NI contribs for 8 years of about £733 per year.

 

It's important to note that for every full year worked prior to the Police, he will have accrued 1/30 x £120 (£4 p/w) to add to the Starting Amount. 

 

So, the $64 million question - is it worth it?

 

Well at £40 extra NI contribs a month (£480 per year), in example 2 (10 years service) he will pay that for 27 years. That equates to £13K. However for that extra payment he accrues an extra £35 p/w State Pension, which is £1820 a year. The average length that people claim a State pension for is 21 years so giving a total of £38K for a £13k outlay.

 

In example 3 (20 years service) he will have paid the £480 per year for 17 years which is £8K. He still gets the same £35 p/w so the extra £38K in total but only for an £8K outlay.

 

Example 4 the outlay is only £3.8K for £38K, the proviso being that he continues to work after leaving the police.

 

The answer is quite simply, yes. The extra £40 NI we pay every month represents an extremely good deal, demonstrated above. It provides a real benefit and is not a ‘waste’ as some people at my work seem to suggest. Contrary to the new Police 2015 pension, we are paying extra but actually getting something out of it. Everyone will benefit. You don’t need to be a rocket scientist to be able to work out that if you have been contracted out for a long period of time (and thus paid 1.4% less NI contribs), but still have enough time to achieve the maximum £155 amount, then you have done pretty well and are one of the winners under the new State Pension.

 

However everyone should be able to achieve that maximum £155 as long as they have sufficient years left until SPA. Prior to the new system coming in, the maximum we could accrue was £120 p/w.

 

Once again apologies for the essay; it’s a complex subject. I do urge people to go online and get a forecast, it’s pretty simple and gives you a guide, shows you your starting amount, number of years contributions, the maximum you can achieve etc.

 

https://www.gov.uk/check-state-pension

 

 

:unsure:  :unsure:   My head hurts now   :D

Edited by Grumpy2
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Good post C.P and i hope you are ready for your retirement in a few years.

Typed from my bed.(having the now obligatory afternoon nap).

Seriously you could start a little financial advice buisiness(with a disclaimer of course)for cops who need information or second opinions.

Edited by john999

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I must admit I treat my NI records with a pinch of salt. 

 

I applied for my records back in September. I have 30 years in the Job as a warranted officer and one year prior to that as a cadet.

 

I can't remember if I paid NI as a cadet but if I did I have paid in for 31 years maximum. I have not worked since retirement. 

 

The statement states I have 33 qualifying years ??????

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I must admit I treat my NI records with a pinch of salt. 

 

I applied for my records back in September. I have 30 years in the Job as a warranted officer and one year prior to that as a cadet.

 

I can't remember if I paid NI as a cadet but if I did I have paid in for 31 years maximum. I have not worked since retirement. 

 

The statement states I have 33 qualifying years ??????

That would be correct, you get years credited for the years from 16-18.

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Found it!. Looks like a Sunday afternoon task !...

https://online.hmrc.gov.uk/shortforms/form/NIStatement

Lol, just goes to show that however much information you give in the initial post (including the link to check your state pension), to quote Zulu's favourite phrase 'there are none so blind than those that will not see'!!!

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The figures quoted got the State Pension are useful, but what is never really explained is that State Pension is at the point of source, untaxed. Good news? Not really. The present tax code for normal people is I think around 10500 meaning that if your income does not exceed £10500 you pay no tax at all.

However if you have additional income such as Police Pension, or any other pension that pushes you income over the base limit i.e.£10500 then your tax code is reduced by a level calculated by HMRC so you actually get a tax code of far lower than the 10500. I think mine is around 5500.

 

So guys and gals, if you are happily receiving you police pension of shall we say... £15000 (arbitrary figure) once you get to the age you get your state pension as well, be prepared to see your tax code plummet! That certainly caught me out.

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CP, I was aware of the state pension forecast link which I have used previously but specifically wanted to establish my N.I record but I now see that's included in pension forecast. I have 29 years already - in my 30th so pension forecast £155.65 which will be earned on police career itself!. If I don't work again that will be collected from age 67 so quite chuffed.

Edited by plasma

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The figures quoted got the State Pension are useful, but what is never really explained is that State Pension is at the point of source, untaxed. Good news? Not really. The present tax code for normal people is I think around 10500 meaning that if your income does not exceed £10500 you pay no tax at all.

However if you have additional income such as Police Pension, or any other pension that pushes you income over the base limit i.e.£10500 then your tax code is reduced by a level calculated by HMRC so you actually get a tax code of far lower than the 10500. I think mine is around 5500.

 

So guys and gals, if you are happily receiving you police pension of shall we say... £15000 (arbitrary figure) once you get to the age you get your state pension as well, be prepared to see your tax code plummet! That certainly caught me out.

Sure but you don't actually pay any more tax than you should. Add up all your income and the first £11k is tax free, followed by the rest which is taxed at 20% - the same as if you worked. It's no different, just done administratively in a different way.

But I agree, if you didn't know then it would catch you out.

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CP, I was aware of the state pension forecast link which I have used previously but specifically wanted to establish my N.I record but I now see that's included in pension forecast. I have 29 years already - in my 30th so pension forecast £155.65 which will be earned on police career itself!. If I don't work again that will be collected from age 67 so quite chuffed.

Yes, it's a much misunderstood concept, but most police officers will benefit from the NI changes.

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