Steve Webb gives us his view of contracting out. He ended it in 2016 after which there was nothing to contract out from. It is worth the three minutes with the former minister to remember just what a big part of many people’s pot, the contracting out of SERPS and latterly S2P was.
Rules of play and “offside”
The eligibility rules for state pension are calculated , you get a different formulation if you are older – it is all laid out here,
But to cut things short; you need 35 qualifying years of National Insurance (NI) contributions to get the full new State Pension. You must have at least 10 qualifying years to get any State Pension, and years earned before April 6, 2016, count towards the new system.
You may have spotted that many of us work more than 35 years – if you started at 16 and retire at today’s state pension age (66) you will have put in 50 years. That is a lot of national insurance that isn’t needed for state pension.
You could get money paid into a personal pension between 1988 and 2016 and get a state pension and a pot of money from contracting out. A full contracting out pot in a personal pension could be £200,000. That’s a lot of excess money to buy later life annuity or drawdown – or get a new (yet to arrive) default pension from the pot.
What of the people who chose not to contract out but kept on building up a full entitlement to SERPS, what of them? Well under the old rules – as Steve says, there would be winners and losers amongst those whose pensions are paid under the old formula.
But those who are getting the new state pension and have a full entitlement there is no deduction from contracting out.
John Greenwood , Editor of Corporate Adviser was such a person. He did not contract out and now has nothing to show for it, despite paying his national insurance throughout as an employee. He smelt a rat back in 2014
He feels he has been short-changed and I can see he has. I have written a lot about this, most recently in 2021, the other side of the dawn of the new rules in 2016.
I can only say that it is an injustice, the COD or contracting out deduction is not always applied and that I assume is because many of us (myself included) will pay national insurance from teenage years to late sixties when we are pensioners.
It is not fair or right and I would add John Greenwood’s story to the short video from Steve Webb.
Relative to staying in , the generation who are old enough to have contracted out and got a pension pot but young enough not to have a contracting out deduction have done very nicely indeed.
I sold hundreds of contracting out personal pensions in the late eighties and nineties, mostly through personal pensions but some through COMPS and most of those sales put free money in people’s pots. I could never have guessed what a great deal contracting out was to some people.
John Greenwood has every right to feel aggrieved, he played a straight bat but got nothing for it. Meanwhile , those who signed the APP forms got an open goal and won the cup for doing nothing but kicking the ball at the net!
