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Will more than 35 years of work benefit my flat state pension?

Retirement | State Pension Helpful? 4

Asked by aonach53, submitted 24 March 2013.

Open Quote I will be 60 this year (June) and am 'retired' and in receipt of a Final Salary Company scheme. WRT a STATE pension forecast recently received, I have accrued 41 years N.I. Contributions and strangely enough, a £7.78pw value of additional state pension. I have aIways 'Contracted Out' of my FS Pension and accrued 34yrs service. I am assuming that I will still only be in receipt of the 'basic' pension of £107.45+ £7.78 (todays rate) as I was contracted out.

Does the additional years over the 35 required only apply if paying Full NI (i.e. in employment now) or does the 6 years 'excess' count towards the x £4.11 per year calculations, when trying to forecast the foundation amount?

I understand that no formula is at present available for the Rebate Derived amount, so that is anyones guess!
I will receive my State pension presently at 65 (so far).
End Quote

Answered by Justin on 13 August 2013

Firstly, apologies for taking so long to answer your question. I have several flat state pension related questions that I bundled together with a view to answering them after revisiting the Government's publications on the subject - something that has taken me far too long to do.

My understanding is that your 6 'excess' years will not count towards the 'foundation amount' calculation for the flat rate (so-called 'single tier') pension.

In April 2016 calculations will be carried out to establish your foundation amount, being the greater of your state pension entitlement under the current system and that under the proposed new flat rate system.

The calculation for the flat rate system will be:

(pre 2016 qualifying years x £144 / 35) less a 'rebate derived amount' if you contracted out of SERPS/S2P at any point.

Since the flat rate pension will be capped at £144, even if you have more than 35 years of qualifying NI contributions, then your calculation will be £144 less the rebate derived amount.

The rebate derived amount is likely to broadly equal the additional pension you would have received had you not contracted out.

If the above calculation exceeds your entitlement under the current system then that is what you'll receive in June 2018 when you reach age 65 (obviously up rated meanwhile).

In the unlikely event the foundation amount exceeds £144 (which will have increased by 2016), then the excess will be protected, but only up rated in line with the CPI measure of inflation.

If the calculation is lower than your 2016 entitlement under the current system, then your current system entitlement will become your foundation amount.

Either way, if your foundation amount is below £144 you would have the option to increase the pension via added years of entitlement at a rate of £4.11 extra weekly pension per additional year of qualifying NI contributions between 2016 and 2018. Whether you will be able to do this by buying extra years (as opposed to working) and if so, the cost, is currently unclear.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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