State pension calculation

[Steveam]

I’ve just received a statement of what I’ll receive from April - it is +9.136% on the current year.
I don’t understand why it’s so high.
I’ve gone through a line by line comparison with last year’s statement:

Basic State Pension: +8.5%
Pre 97 additional State Pension +6.7%
less Contracted-Out Deduction (COD) +1.25%
Total payable +39.45%
All other elements rise by +6.7% (there are a lot: post 97 additional, extra basic, extra additional, graduated retirement benefit and state pension top-up). I deferred for a while and bought extra some years ago which was further deferred, etc)

Any pointers would be much appreciated. The amounts, in the great scheme of things, are modest but I’d like to make sure I’m not being overpaid.

TIA

Best wishes, Steve

[mc2fool]

8.5% is the triple lock increase (driven by national earnings) and is applied to the Basic State Pension and the New State Pension. 6.7% is the September 2023 annual CPI figure, which is what is used for everything else. The Contracted Out Deduction is the same as the Guaranteed Minimum Pension you get from your contracted out company pension. I don't know where your other numbers come from....

[Steveam]

8.5% is the triple lock increase (driven by national earnings) and is applied to the Basic State Pension and the New State Pension. 6.7% is the September 2023 annual CPI figure, which is what is used for everything else. The Contracted Out Deduction is the same as the Guaranteed Minimum Pension you get from your contracted out company pension. I don't know where your other numbers come from....

Thank you mc2fool. It’s the fact that the contracted out deduction only “increased” by 1.25% that, I think, I’m querying. If I’m understanding correctly they are subtracting the contracted out deduction from the pre 97 additional state pension to give a net figure but they’ve increased the the pre 97 additional state pension by 6.7% and the deduction by 1.25% the net amount has increased by 39.45%.

All the other bits and pieces (quite a lot) I’m happy is increasing by 6.7%.

I’m really very appreciative of your comments/insights on this.

Best wishes, Steve

[mc2fool]

8.5% is the triple lock increase (driven by national earnings) and is applied to the Basic State Pension and the New State Pension. 6.7% is the September 2023 annual CPI figure, which is what is used for everything else. The Contracted Out Deduction is the same as the Guaranteed Minimum Pension you get from your contracted out company pension. I don't know where your other numbers come from....

Thank you mc2fool. It’s the fact that the contracted out deduction only “increased” by 1.25% that, I think, I’m querying. If I’m understanding correctly they are subtracting the contracted out deduction from the pre 97 additional state pension to give a net figure but they’ve increased the the pre 97 additional state pension by 6.7% and the deduction by 1.25% the net amount has increased by 39.45%.

All the other bits and pieces (quite a lot) I’m happy is increasing by 6.7%.

I’m really very appreciative of your comments/insights on this.

Best wishes, Steve

1988-1997 GMP increases are paid by the contracted out company pension scheme, but capped at 3%. If CPI is more than that then the extra is made up in the additional state pension. For pre-1988 GMP the whole of the increase is provided in the ASP.

See https://commonslibrary.parliament.uk/research-briefings/sn04956/

However, a complication is that depending on the GMP revaluation method in deferment used by the scheme it's possible for the GMP to be more than the ASP that would have been earned if not contracted out, in which case there are no ASP provided increases for the GMP until and unless the otherwise-ASP catches up and surpasses it, and at that point, when it goes from nothing to tiny to still very small the % increases can look massive, even if they're tiny in £ amounts.

[XFool]

...Beat me to it!

I was willing to explain this - I am working on it - by going through examples taken from my own, similar, situation. If it helps: Watch this space...

[XFool]

8.5% is the triple lock increase (driven by national earnings) and is applied to the Basic State Pension and the New State Pension. 6.7% is the September 2023 annual CPI figure, which is what is used for everything else. The Contracted Out Deduction is the same as the Guaranteed Minimum Pension you get from your contracted out company pension. I don't know where your other numbers come from....

Thank you mc2fool. It’s the fact that the contracted out deduction only “increased” by 1.25% that, I think, I’m querying. If I’m understanding correctly they are subtracting the contracted out deduction from the pre 97 additional state pension to give a net figure but they’ve increased the the pre 97 additional state pension by 6.7% and the deduction by 1.25% the net amount has increased by 39.45%.

Ah yes! This 'happens'.

I take it you refer to the "Total Payable" as a result of "Pre 97 additional State Pension" - "Contracted - Out Deduction (COD) of" figures? In my case:

with the 2024/25 SP Statement this has 'increased' by 35.53%
with the 2023/24 SP Statement this had 'increased' by 106.81%
with the 2022/23 SP Statement this had 'increased' by 28.12%

But these are not really valid calculations...

To understand, you need to read your DWP SP Statement in combination with your employer's Contracted Out Pension statement - and understand the rules.

Different tranches of your employer's contracted out pension are indexed differently, this should show in the statement. Taking mine as an example:

Pre 88 GMP - Not Indexed
Post 88 GMP - Indexed by CPI, up to a maximum of 3%
Pre 97 Excess - Indexed by CPI
Post 97 Excess - Indexed by CPI
Post 05 Excess - Not Applicable

Now here (Post 88 GMP Amount + Pre 88 GMP Amount) = Total GMP.
And the above (Total GMP) / 52 = DWP SP weekly figure for: "less Contracted-Out Deduction (COD) of".

This COD figure is subtracted from the CPI indexed "Pre 97 additional State Pension" figure on your DWP SP statement. By this simple mechanism, your entire employer's pension increases for "Pre 88 GMP" amount is transferred to and paid by the SP, not your employer's pension scheme and my (your) employer's pension increases - above 3% - for the "Post 88 GMP" amount is transferred to and paid via your SP. That is, up to 3% it is paid by the employer's pension scheme, any above that by the DWP SP.

Under these circumstances, simply looking at a year on year percentage increase in the Total figure from the difference in the subtraction of these two figures in the DWP SP statement is 'interesting' but pretty meaningless.

[Steveam]

Oh heavens! My head hurts but I think - for the moment - that I understand. Brain the size of a shrivelled pea and I’m using it on this! Gimme a break

Thanks both.

Best wishes,

Steve

[mc2fool]

Oh heavens! My head hurts but I think - for the moment - that I understand. Brain the size of a shrivelled pea and I’m using it on this! Gimme a break

Let's take a simpler example...

The primary thing to remember is that the point of contracting out is that the company scheme will provide you with a Guaranteed Minimum Pension of (at least) the amount of earnings related Additional State Pension that the government would have if you hadn't contracted out, instead of HMG providing it.

The other thing to note is that the Contracted Out Deduction is simply the GMP amount on the other side of the equation.

Now, let's take the simple case of pre88 GMP which, once in payment, has no increases from the scheme but cost of living increases are provided wholly by the govt instead. Let's call the ASP you would have got if you'd stayed contracted in as "InASP". The government will take your GMP (as COD) off of your InASP to determine the NetASP they'll actually pay you.

Now, let's say that at retirement the scheme pre88 GMP has matched the InASP exactly, and let's say they're 100p/wk.

So, at retirement your scheme will pay you a pre88 GMP of 100p and the govt will pay you a NetASP of 100 - 100 = 0.

A year later the InASP has increased to 102p. So your scheme will still pay you a pre88 GMP of 100p and the govt will pay you a NetASP of 102 - 100 = 2p.

Another year on the InASP increases to 104p; your scheme will still pay you a pre88 GMP of 100p and the govt will pay you a NetASP of 104 - 100 = 4p.

While the increase in NetASP looks massive -- 2p to 4p is 100% -- the overall picture is that you're actually getting an increase from 102 to 104p.

Now, as I said, some schemes will give a GMP that is greater than InASP at retirement, so if we say that in the above example the GMP is 103p, then you won't get any NetASP in the first two years and in the third year, once the InASP has reached and passed the GMP, you'll get 104 - 103 = 1p of NetASP, etc.

HTH!

[tjh290633]

I don't know about anyone else, but my occupational pension includes the GMP associated with the COD, and that increases by a small amount each year because of when it accrued, pre 1990. The rest is inflated each year by the pension fund rules, which happens to be 3% per year. My wife retired in 1986 and her COD remains constant.

It all got very complicated, but the sums add up.

TJH