Investing in…the State Pension?

One for early retirees older than 40, really, the known unknowns are too great when you’re younger, but otherwise it could be an offer of an annuity at an unbeatable rate of more than 100%. Try getting that on the open market!

I’ve never really taken UK State pension into account in my financial planning, for two reasons. One is that it never seemed to be near enough, and I always assumed it was going to be means-tested, and the second is that I have sufficient private pension. I’ve also been contracted out for 2/3 of my working life, which means I would get less anyway.

Over the 30-40 years of an adult working life, you will go through many fads and phases of the State pension, you will see at least 8 government administrations, well, assuming that the logical conclusion of Brexit isn’t a one-party state at some point. Each of them will fiddle. As a result I filed the SP in the ‘too hard to think about and not very relevant to me’ department.

Now someone pitching for financial independence and retiring early is likely to have a shortened working life, I had 30 years of proper working, ie rolling up at a place of work and getting paid for my trouble. When I started work you had to have 40 years of working life to earn a full State Pension, elementary arithmetic showed me that leaving university at 21 and retiring on a typical white collar pension scheme retirement age of 60 was going to leave me a little short, and I compounded the issue my taking a year out to do an MSc in the late 1980s1. As it was there were no other periods of unemployment until my career ended at 52. Fortunately for me they changed the rules in 2006 I think so I only needed 30 years. I was chuffed, because 52-21-1 makes 30 years so I was home and dry.

Then they changed it again in 2016 so I needed to get 35 years, and now I am SOL because not only am I 5 years short, a sixth of the total, but I was also contracted out and there were dark mutterings that this will cost me a lot. Looks like my original suspicion this will be means-tested or money-grabbed out was right.

I’d already gone through the pain of getting a national insurance record statement from HMRC, which involved filling in forms and sending them off up North somewhere and waiting an interminable period before a computer printout landed on my doorstep through the post. I read this Torygraph article bitching about how it was all too hard and thought I would actually go read the PDF written by the ex pensions czar Steve Webb, because he always struck me as a sensible sort of fellow except for a brain fart when he invited pensioners to go get a Lamborghini.

That'll be a nice Lamborghini, and to hell with the money
That’ll be a nice Lamborghini, and to hell with the money

He now works for Royal London insurance because ,well, nobody voted Lib Dem in the last election and he was one of them. Turns out he has written a pretty coherent guide, and it appears that the Telegraph was shit-for-brains when they wrote their article, or collectively feeling the after effects of a particularly excessive office party. In particular, their “Topping up your state pension guide” is the dog’s bollocks, written by none other than Steve Webb. I can only presume the Torygraph journos are arts/PPE grads who are scared by  flowcharts ;).

It’s so good I’ve saved a local copy of it here because when I go through my older posts featuring external links, it is clear that Jakob Nielsen was on the wrong side of history in his 1998 “Fighting Linkrot” article. That’s battle was comprehensively lost, we all know what happened, the good guys lost and were trampled into the ground.

You can now get your NI and State Pension forecast online

Something that I learned from Steve was that you can go here

and go get your own SP forecast. It helps if you already have a HMRC ID like from self assessment, and you want a copy of your passport nearby, but it went okay for me, and you get much more detail on your NI payment history than the old system. It turns out an Ermine’s NI record, if I had stopped contributing in April last year, is good for a State Pension of  £141 p.w, which is about £7300 a year.

Now at a SWR of 4% that is effectively a bond portfolio of £182500. It has different risks to a bond portfolio – it has political risk rather than market risk. That’s not so bad if it is part of your portfolio, as opposed to nearly all of your retirement savings, however, because diversification of risk is a good thing. Its nature, however, is well suited to underpinning market risk, and bond investing in boring. I personally hold no bond assets whatsoever, but this is because I have a deferred defined benefit pension due in four years, and this covers the same sort of risk. I also have far, far more equity savings in my ISA than my SIPP, because I don’t want to pay tax on my savings, so I am running that SIPP into the ground ahead of my pension.

The State Pension offers an early retiree a great annuity rate

For two possible reasons – if they are an early retiree they probably don’t have 35 years of NI contributions, that’s the whole point of early retirement, and moreover they may have been contracted out. It is the second reason that makes it worth me contributing another three years of NI contributions, because that will wipe out my contracted out deficit, and I will reach the upper ceiling of £155.65 a week, ~£8191 a year. The obvious question here is ‘is it worth it’. That nice fellow Steve has done the dirty work for you here. You can choose to sit on your early retired chuff and pay voluntary Class 3 NI contributions, at ~£730 a year (it depends which years you are buying, I am assuming in my case these are years going forwards, though I could pay a little less to buy out years 2013 and 2014). which buys me ~£207 a year according to Steve.

A far better way, however, is for an Ermine to be self-employed for three years and to pay his Class 2 ~£150 a year NICS. An ermine obviously doesn’t want to pay tax, so I work at a very low level, nominal minimum wage for 1 day a week. However, I don’t spend a day a week doing that – I hired the magic of PERL to extract the records from a bank account to inject into Quicken for that job, where the previous lot used to type in all the transactions. Because I don’t need to pay PERL any wages, my earning rate goes up from NMW, but I go a lot more part-time to compensate 😉 The pay rate is still pretty piss poor compared to The Firm, but it beats NMW by a long chalk, and I don’t pay tax on it2

Now paying £150 to get £207 a year for say 10-20 years 12 years in the future sounds like a bloody good deal to me. I paid my £150 with alacrity and good heart this April for the year 2015/16. Technically Steve Webb is right and I should refuse to pay for 8 years and then pay up all at the end, because for all I know I could cark it tomorrow or sometime in the next 12 years go and do a Jim and go back to work because I miss the metrics and performance management shite so terribly that I need it back in my life. But sod it, I am going to pay my £150 early for peace of mind. And next year and the year after that.

There aren’t many places you can go buy a deferred to 67 inflation-linked annuity returning 138%. Normally you are looking at 3% and have to have one foot in the grave to get a better rate. Even if you can’t find a way to look self-employed and go the Class 3 NICs route you’re looking at an annuity paying 28%. A top rate, risk and asset-class diversification and backed by Her Majesty’s Government. You owe it to yourself to at least ask the question of whether you can do this 😉

force majeure

There’s always going to be the tin-foil hat brigade that say that these promises aren’t worth the steam off their piss and will be repudiated. I am/was one of them, but in the end it’s down to Stephen Covey’s Circle of influence versus circle of concern. Personally I prefer the other statement of the same conundrum –

For sure, the government may repudiate the State Pension, tax the crap out of it, the buccaneering Brexiteers may destroy the value of the pound so much that a pound buys you half a peanut in 20 years or there may be a war of all against all. Any or all these things may come to pass. I’ve got a lot more chilled than when  I was working, shit happens but not usually all the shit happens. There’s somebody offering me a taxable inflation-linked income of £890*0.8(because of 20% tax) for a one-off cost of £600 spread over four years, and over there there are people offering me the same £891 as an annuity for about £23,000. I’ll take the government up on their kind offer and to hell with the downside. I can afford to lose £600 for those odds.

  1. Looking at my NI record I see that either my younger self bought the extra NI when I went back to work, or for some reason doing an MSc on a Manpower Services Commission grant meant I got NI credits for that year. I didn’t get NI credits while doing my undergraduate degree 
  2. because I am careful to only have income below the personal allowance, rather than I am keeping it all in the British Virgin Islands with Mossack Fonseca  ;) 

60 thoughts on “Investing in…the State Pension?”

  1. I downloaded the Royal London document at the weekend and went straight online to check my pension forecast. Apparently I’ll get my pension at 66 rather than 67, which was pleasant news and different to when I checked three years ago. It was also more than I was expecting, presumably because my years of SERPS have been included to offset the period of time contracted-out. It did not look like there was any benefit to me paying any more NI, since I have 39 years contributions and the two years I missed since early retirement would only amount to about £1.80 a week extra based on the 5 April 2016 baseline date. Big slug of money up front that would take many years to recoup.

    No real idea whether I fall into a category that can’t make any further class 3 contributions however, the forecast suggested deferral was my only option. That is the next part to research.

    What the forecast did not say was whether my pension was based on the old or the new system. I suspect it was the old system because it was more than £155.

    The government pension site is very straight forward once you have passed the identity checks (which are also painless).


    1. > What the forecast did not say was whether my pension was based on the old or the new system. I suspect it was the old system because it was more than £155.

      There is some rule saying if you had acquired rights of more than the new system under the old system as of April 2016 those rights would be grandfathered. You may as well sit on your hands until you’re 66 and ask the question again, and backpay the last year if it brings you up any.

      There were rumblings that they will turn the current online system into a ‘what-if’ scenario tester for top-up payments, so worth keeping an eye on it.

      I too was surprised at the lack of grief getting through the ID checks!


      1. It’s no longer possible to be contracted out so any reductions to the calculation of the old state pension should remain unchanged, I would have thought.

        The Govt calculate your entitlement under the new and old rules and you get the higher. If you’re still working (or are intending to make Class 2 (quickly, quickly!) or Class 3 payments) then you can calculate at what point the new state pension will overtake your old. Of course this may never happen – the full new state pension is greater than the full old basic state pension but the earnings-related elements of the old pension may mean that you’re entitled to more than the full new state pension (even after contracting out adjustments). Your over £155/pw would indicate this is the case.

        The report I got from my last BR19 form clearly showed the state pension I would get and, slightly less clearly, an estimate of the additional DB company pension I would have accrued due to having been contracted out. Anyone reading this thread should get a forecast – BR19 works great, will try the internet version later to compare…


  2. You”ll want to read this new government state pension age report, and respond to the open consultation running now.

    People may not know you get 2 years NI when at school 16-18. I’ve made a diary entry to pay back contributions before the 2023 deadline.

    I’m on 30 years with 18 years before state pension age, so no hurry to pay in more, but I like the Class 2 wheeze.


    1. better get in quick on Class 2 as Richard says below! On closer inspection I was thrown by the apparent extra 3 years I received for being at school in the 1970s getting me closer to 35 without having worked. Looks like university students still don’t get NI credits but perhaps I did for the 1 year MSc because the Manpower Services Commission was an arm of the Government.

      Interesting observation on page 82 of that review

      It should be noted that private pension entitlement is a property right (unlike state pensions where entitlement is based on the rules approved by Parliament on the day the person claims).


    1. Damn, no sooner do I see an easy win and they get to ice it. Having said that I only need three more years (2016/17, 17/18 and 18/19) so I will do the next two and perhaps knock it off in 2018/19.

      Even at £700 p.a. if you’re short of years it’s an annuity percentage offer you can’t match anywhere else!


      1. LOL! A payback period of 1 year was always going to be a juicy target for the Govt.

        Even Class 3 – £733 one-off payment for £231 pa for the rest of your life (from mid-60s) – is still a great deal. Especially as you can wait to see if you make it to your state retirement age in good health and then back pay up to 6 years.

        I’m about 6 years short if I retire when I expect to, so this is a good plan for me – unless they change the rules again.

        The state pension is quite a major plank of my retirement modelling. If I get a full pension (as is likely) then that, together with a small DB pension, covers all my essential expenditure and a little bit more. My investments then only have to get me from early retirement to drawing those pensions. Anything left in the SIPP/ISA/Bank at that point is then play money.

        A key goal is to be able to answer in the affirmative “when I reach pension age, can I live reasonably well on my pensions?”. If the answer had been “no”, I’d be a lot more worried. Investment modelling is one thing, but a guaranteed income something else entirely.

        I’ve not tried the online pension calculator, but I submit an annual BR19 form to get a pension forecast. Comes back in a couple of weeks and the last one clearly was including the new, as well as old, pension regime calculations of which the state give me the higher.


    2. Isn’t the aim of removing class 2 to simplify by incorporating into class 4 and so class 4 would then qualify for benefits, such as state pension? From the little reading I’ve done there will be a zero rate band of class 4 for those whose profits would have previously had them paying class 2 but not class 4:

      “The introduction of a profits test into Class 4 would mean that the new contributory benefit tests for the self-employed would operate on the basis that annual profits at or over the Small Profits Threshold in Class 4 NICs (~£6000 on introduction) confer one qualifying year towards benefit entitlement”

      So would there still be an option to make up missing years this way?


      1. > So would there still be an option to make up missing years this way?

        Probably. But I am FI and I’m a lazy bastard. Earning a profit of £6000 p.a. sounds too much like hard work to me 😉 And Class 4 is 9% of 6000 = £540, which is dearer than £150 although still great value for an annuity. I’ll milk the old system while I can!


      2. 9% on the amount over £9k currently, so not so bad –

        While the Govt are intending to reform Class 4 the article I linked to above does not hold out much hope that it will be possible to get pensionable years without either paying the higher Class 3, or working to earn a profit over £6k. I don’t see the “do no work, pay a few quid, get an extra year’s pension” gig continuing once Class 2 goes…


      3. Oh well, I’ll still get three years for £450 in all. Makes me a little bit less sore about the thousands in the NI slot for some years of the NI record. Plus I can then decide to pay the cheapest Class 3 for 2013/14, and I can delay that till 2019. I guess it was too good to be true for long!


  3. Merryn Somerset Webb wrote an article in the FT on NIC top-ups almost exactly a year ago (I can’t post a direct link to FT articles, but Google it) concluding it did not offer value for money.
    However, her article referenced a limited 18-month window in which to take action, and discussed buying additional amounts of pension rather than adding missing years, so does this differ from what you’ve written about? It really is a confusing system!


    1. Presumably that’ll be this article. To be honest I’m buggered if I know what she’s talking about in the first section. That seems to have been some specific transitional agreement from the old system, but go scroll down to her picture and she says

      It’s also worth noting that there are other — much better — ways to top up a state pension. If you haven’t already got 30 years of national insurance contributions you can pay to fill in the gaps. Each year costs you £733.20 and then pays you an extra £200 a year. That’s a payback of less than four years for non-taxpayers and just over four years for 20 per cent payers. That’s got to be better than 17 and 21.

      which is the dearer one of the options I was talking about here, and the only one available after April 2018. Class 2 NICs are even cheaper at £150 p.a so if you are retired early between now and April 2018 and short of NIC years then become self-employed for some minor amount, pay your Class 2 NICs through self assessment and enjoy > 100% ROI on your investment as long as you don’t peg it before SPA 😉


      1. Yep, just saw that bit – should have read the full article. I’d hope to retire early with 25ish years, all but a couple of which are contracted out so it’s something I’ll need to look into.
        Not sure if it’s specifically relevant to your article, but there’s also something about you can have 35 years of full NICs, but if you have additional contracted out years over and above that, you still face a deduction from the new flat-rate amount. According to a DWP comment “This ensures that people don’t get paid twice for the same NI contributions” (Feb ’16 article in DM’s Thisismoney)


      2. there’s also something about you can have 35 years of full NICs, but if you have additional contracted out years over and above that, you still face a deduction from the new flat-rate amount

        That’s me – the website tells me I have 34 years paid up, about 20 of which are contracted out – but I also have about 5 years additional state pension, or sencond SP or likewise from the non-contracted out years. Anyway, I am short of the total amount, and still will be when my £150 paid April this year for 2015/6 is added, rolling me up to 35 years NICs.

        But I can accrue the contracted out shortfall with 4 more years (ie 3 years over 35). This is about doing that as cheaply as possible. Become self employed, earn less than £8060 p.a. and pay your £150. For an additional bonus, If you’re over 55, pipeline 4/5 of your £8060 earnings through a SIPP to pick up an added £1600, because you can 😉


      3. I’m no expert, but I think the old state pension had the basic element and the earnings related element. If you contracted out you got a lesser earnings-related amount (as for those years you had “contracted out” of the earnings related bit). Of course if you were contracted out the Govt was paying into your company DB pension.

        As the new state pension has no earnings-related element the Govt makes a deduction from that to account for contracted out years.

        Old system = Basic state pension + earning-related element for years you were not contracted out (plus contribution towards your company DB scheme for the years you were contracted out)

        New system = New flat rate state pension less an amount for years you were contracted out (plus contribution towards your company DB scheme for the years you were contracted out)

        So the old scheme has a lower basic but tops this up for years you were not contracted out. The new scheme has a higher basic but makes a deduction for years you were contracted out.

        (Of course the Govt didn’t directly pay into your company scheme, but the same effect was achieved via lower employees’ and employers’ NI in contracted out years.)



  4. Thanks for the nudge.

    My results indicate £155.65 assuming I pay complete NI for two more years before 2021.

    What I don’t understand (because its not really spelled out) is the significance of the Contracted Out Pension Equivalent (COPE). In my case COPE is £20.63 per week.

    Is that £20.63 pw some kind of nominal amount that I’m being told to expect from an employer pension, or does it have an impact on the headline figure of £155.65 they quote?

    In other words … should I read £155.65 as actually being £155.65 – £20.63 = £135.02?

    The Royal London guide is helpful, but searching for “COPE” gives nothing, and “contracted” gives just 3 matches – which don’t really explicitly state what it means.


    1. My understanding is the same as yours.

      COPE is in addition to your state pension forecast. It tells you a notional amount that your contracting out has gained you in a company DB pension.

      Essentially the statement says “we have made a deduction from your state pension calculation because of your time spent contracted out. However we have tried to estimate the benefit to your company DB pension that such contracting out accrued. Thus your years of paying NI have contributed to a (reduced) state pension but also to your company pension, so overall you have not lost out by contracting out.”

      From memory this is semi-clearly pointed out in the accompanying booklet (that you get if you go down the hard copy BR19 route).


      1. Thanks, Richard.

        So £155.65 from the state, plus any company / private pension, and something like £20.65 of that company / private pension will be as a result of my contracted out status. Got it.


      2. Yup – I think that’s right.

        The booklet that comes with the pension statement is here –

        On p13 it concludes “Most people with many years on their NI record will find, when the State Pension paid by government is added to their COPE amount, this will be at least the full amount of the new State Pension by the time they reach State Pension age (the full amount in 2016/17 is £155.65 a
        week).” Which is basically what I said, I think.

        COPE has caused a lot of head-scratching and it’s only now becoming clearer. At the time even the experts (boo!) had a “we’re not sure, wait and see” approach.

        But bear in mind the rules can easily change. The May govt is unpicking some of Osborne’s changes, and the triple-lock is bound to go (IMHO). Class 2 is vanishing, and so who knows what the pension landscape will be like when we retire. I suspect the state pension will vanish once workplace pensions have been around for a few decades. But, like the changes we’re discussing re the new state pension, I suspect that things will be broadly neutral for entitlement already “banked”. On that basis I factor in my current state pension entitlement into my financial models.


  5. The biggest winners here are going to be the experts paid to explain it to the confused – I have 3 degrees & this stuff gives me a headache…..

    A young relative just starting work asking me what the best thing to do is & was confounded when I said I can barely work out my own situation – their generation are convinced the state pension will be extinct by the time their number’s up. All I could say with any confidence was keep any employment & tax paperwork your whole life, then put into private-employer matched schemes to get the maximum out of them. Any more funds you can spare put into ISAs & keep an eye on the performance of all to switch providers if you’re getting crap service. Forget about the state pension, but if anything comes out of it, that’ll be a nice surprise. [ They could get millions if the £ has gone the way of the Zimbabwean $ by then 🙂 ]

    A colleague who’s been working here for 20 years & is a European national is sweating about being ejected & simultaneously relieved of her life’s pension contributions …..the vitriolic output from politicians is unnerving.


    1. I didn’t believe the SP would be there for me when I started work in 1982, and because the personal allowance and thresholds were lower relatively speaking than now it made me sore, particularly as I was trying to save 33% of my gross pay for a secondhand preamplifier (it wasn’t a bad ‘investment’ – it’s still in service).

      But now I am grizzled of fur I have to admit my younger self was probably wrong. Maybe there’s hope for people starting now, I was just as sure it would go down and now I am investing in it 😉

      I would hope that the vitriol is just that. The EU has logical rules for pension accrual across member states, and her accrual to date has been within a member state. Hopefully logic will prevail and these rights will be grandfathered. Our buccaneering Brexiteers may want us to shoot ourselves in the foot going forward, but they aren’t smart enough to do an HG Wells and make a time machine to go back and Brexit us in 1980.


    2. I take your view: keep all paperwork (especially in our wonderful new all-digital age of hackers and viruses), make your own private provisions if/when and don’t rely on the state pension being around when you’re finally supposedly entitled to it.

      I just checked my record online, thinking like some others here that being short of fully paid up years my forecast amount would be thruppence ha’penny and a bent paper clip (or enough to treat myself to a tin of cat food each Christmas). It came up with the same 155.65/week figure seen elsewhere, on far fewer than the 30 years I thought were required. Have I misunderstood or have things been “tinkered” with again ?

      I’ve always had a deep mistrust of any “investment” where you are PREVENTED from touching the proceeds until a long way into the future AND there’s a not insignficant risk of the damned rules changing in the meantime (especially where tax is paid on the way OUT). I like ISAs – at least you can see the buggers coming and the tax is already paid on the way IN !


      1. IIRC the new electronic version has a big number at the top and shows the max state pension you’ll get if you work to SRA (which might be more than the max 35 years that count). I can’t check again as it insists on sending an access code to my home phone…

        Further down there’s the amount you have “banked” with your contributions to date, and the rules as they now stand. The COPE amount is on the following page.

        So no tinkering I don’t believe. And it’s 35 years for the new state pension, not 30. Bear in mind it used to be 40 years, I think, a while back.

        I get the £155/pw forecast at the top but have banked £126/pw. (As I’ve done my own analysis I know that this is what I banked under the old system (need 30 years (with ages 16-18 given for free) plus the earnings-related element (for years not contracted out). The new system (35 years, no credit for 16-18, reduction for contracted out) gives a lower amount currently. In time though my pension under the new system will eclipse the old.)

        We all choose the level of paranoia / cynicism to apply to these figures. To some extent this will depend on how far you are from SRA.

        Given that the current (not forecast) amount is clearly stated, and that state pensions are currently fully taxable it’s hard – for me, at least – to see that these banked to-be-taxed amounts can somehow be removed or “made worse” except in one area. That area is inflation protection. There never used to be much (CPI? but RPI before Thatcher?) and then we went into the “Triple Lock”. That has meant that above inflation pension increases have converged with declining salaries since the recession to make pensions once again have reasonable purchasing power. £8k / yr (or £16k for a couple) is a pretty good safety net when the minimum wage is c£12k and average household income £24k (or thereabouts).

        Taking the bigger picture the UK is (and always will be no matter what your Brexit/EU views are) a relatively wealthy country. We’ll remain highly taxed and – by and large – the Govt will always provide an old-age safety net (using our taxes, of course).

        To say “there’ll be no state pension when I retire” is, I think, taking prudence too far. I suspect old-age provision will be a mix of “normal” company pensions (mainly DC in the private sector), workplace pension schemes (DC linked to salary), state pension (universal, possibly eroded by lower inflation protection) and pension credits for those that fall under the radar. If that gives (almost) everyone a low-ish to reasonable pension in old age (to be augmented by savings, release of housing value and/or inherited wealth for the lucky) then, as a nation, we’ve done okay.

        PS nothing to stop the Govt changing the rules on ISA tax/limits/whatever. There are no certainties – all you can do is to try to stack the deck in your favour using the rules in play at the time.


      2. @Mike The whopping big number (for most £155.65 pw) is what you could get, assuming you stayed in the traces until your SPA. There’s an argument that they should work on the usablity of the website, because you have to go into the breakdown.

        In my case, based on my NI record up to 5/4/15 I get £141.13 pw and they forecast if I contribute another 4 years I would get the £155.65 pw. One of these is in the bag, another two will cost me £300.

        I didn’t find it too hard to see I had only bagged £141.13 pw but then I had the benefit of previous paper forecasts. You need to look at the detail – agrred the usability isn’t great. Or they are assuming that early retirement is such a 1990s thang and nobody does it now!

        > make your own private provisions if/when and don’t rely on the state pension being around when you’re finally supposedly entitled to it.

        Not a bad policy, assuming you can afford it, and the one I took. But as you get closer to SRA its uniquely different risk profile and annuity-like character is worth factoring into your investment mix. Mine is more racy and equities – based precisely because I have enough annuity income to keep the wolf from the door and a bit more from SP and DB pensions. The diversification is worth taking into account in the later stages, where you’d normally start to derisk your investment portfolio. The SP works against that – it’s annuity-like, and it becomes more reliable the closer you get to drawing it, which is exactly the time people often lifestyle their portfolio towards fixed-interest.


      3. @Ermine & @Richard: sorry guys, my fault – basic one here, namely “learn to read the sodding page properly” 🙂 The stuff lower on the page clearly makes sense. I do think a big banner at the top with “your forecast” tends to start you off thinking it’s the number at the top when it’s the (no surprise !) smaller print lower down, of course.

        On reflection, it would help diversify my situation. I doubt I’d be stuffed if it didn’t materialise and I’ve plenty of time to make the necessary changes anyway by the looks of it.


      4. I agree, the numbers should be the other way round, ie your banked number should be the first one shown and then the forecasted number below, to indicate you have to continue to pay NIs to achieve that number.


  6. Hi Ermine,
    Great post as always – and interesting reading on the state pension. Like you – I am assuming that there will be no state pension available for me when I get to the state pension age (I am assuming of course I make it to 67 according to them!). I haven’t done a check on the years of NI contributions, but I suspect if I manage to FI (this will mean building up enough savings outside of a pension whilst maximising a pension for tax reasons) it will be well before the state pension age, and then they will change the rules once again, so I am a wait and see.

    In your shoes I would go for the cheapest top up option, and when I get closer if there is a similar option I probably will as well – if nothing else I can put it into my ISA 🙂
    London Rob


    1. I’ve taken the same line – my ISA is larger than my SIPP because of the tax issues. The SP will shove me deeper into tax, but then it’s not a bad problem to have. But all my DC equity income will be ISA based and hopefully tax and CGT-free.


      1. Very sensible – my aim is to fill the pension, fill my ISA, and then find as an effective tax limitation approach as possible, combination of tax allowance, dividend allowance (if it is still in existence then), CGT allowance, for both myself and my other half. At least I know we should be able to get at least 50k between us with a zero tax rate. If I do get any of the state pension then I will use that and reduce what comes out of my own pension, but I have along way until I have to worry about that 😦


  7. @Richard, why do you think the new pension doesn’t account for years 16-18. I’ll hit SPA in 2034, so surely am in the new scheme, My ‘banked’ £129 is based on 29 years including those years. My forecast is £155 with £34 COPE, which I still find confusing, as I know I contracted out for 3 years, think the Civil Service did for 10 years, and probably happened for 10 years more. But £129 is 29/35 of £155, so I see no evidence of a reduction because of the contracting out.

    Its all a mystery, as I was paid enough that the contracted out NI was more than the contracted in limits for others on a lesser salary. Perhaps that is why there is no reduction.

    As the state pension with all these rules comes across as a savings scheme, I don’t think any government could convert it to a benefit to means test. All they could do is change the absolute sum, not the number of years accrued, without huge backlash. So Triple Lock will go, but means test won’t be introduced.


  8. Hmmm…I was doing that from memory. When the number of qualifying years was reduced to 30 (in 2010) the credits for 16-18 were stopped for those newly 16. See point 25 in [This document is a masterclass in the complexity of a single tax…]

    So…years 16-18 probably still count in you were 16-18 before 2010.

    Apologies for misleading anyone.

    I think everyone is getting the £155 forecast because at our ages (40s mostly I guess) and SRA (67-ish) we have getting on for 20 more years to work.

    The rules imply that while only 35 years count, if you have more than 35 years’ NI contributions the Govt will count those where you were not contracted out first –

    This means you can – in principle – get a full new flat rate state pension and also have some COPE. (I also read somewhere that contracting out only counts for reductions if it was between 1978 and 2006, even though contracting out went on until, I think, 2012. I also think that the deductions for contracting out are greater in they were in the earlier years of the 1978 – 2006 spread.)

    I’m in a similar position to you. While your banked element might seem to be 29/35 without a deduction for contracting out, you may find it’s actually 29/30 of the old weekly limit plus something for earnings-related when you weren’t contracted out. This would be the case if the value under the old rules is – currently – higher than under the new rules.

    In my case I have 27 years (including 16-18). Under the new state pension my current max (i.e. assuming no contracted out) would be 27/35 * £155 = £120. With contracting out (which I was) it would be less, if I’ve understood the rules…

    But my current forecast is actually £127 so it can’t be calculated under the new rules. I’m guessing it is 27/30 * £120 = £108 plus something for my earnings-related element when I wasn’t contracted out. £120pw being the max basic under the old rules.

    The problem is it’s impossible to find the exact rules for calculating the earnings-related bit under the old rules, and the contracting out deduction under the new rules.

    I have a feeling that the old pension forecasts did split out basic and earnings-related (but didn’t give the calculation) but I don’t have one of those to hand.

    However I’m looking at £126 banked (I think) and £42 COPE (which I ignore as it’s already factored into my company pension forecasts). I’ll just focus on that!

    Flippancy aside, I don’t think anyone really understands the new and transitional rules…


  9. @Mike7circles,
    Re future State Pension Cost as %ge of GDP, do you happen to know what assumptions are made about future GDP growth?

    As a grizzled old sceptic already in receipt of State Pension having deferred it for one year to get an extra 10% or thereabouts, I offer a few thoughts:

    a) Don’t look a gift horse in the mouth. If anything offered by the maze of government-endorsed saving schemes, tax reliefs or benefits seems to be absurdly generous or be of disproportionate benefit to the already better-off, unless you object strongly on ethical grounds, take advantage of it to the full now on the assumption that it will be withdrawn in the fullness of time. I’m old enough to remember when index-linked NI certificates offered RPI + 4% and none of my colleagues were using them.

    b) Based on a), I would assume that for the State Pension, 2 elements of the triple lock will be dropped, probably CPI-linkage and the minimum increase of 2.5%.

    c) I wouldn’t assume that average (I assume for SP increase purposes, mean rather than median is used) earnings progress much ahead of CPI if at all over the long-term for the reasons which he of grizzled fur has discussed extensively on this blog.

    d) I expect NI and income tax to be merged for taxation purposes with, initially, some kind of protection for pensioners which is subsequently stealthily reduced.

    e) I’m sceptical about projections about how much DC schemes in future are going to generate in the form of pension income because of the precarious nature of employment which now exists and the size of the pension pot which is needed to provide a significant income over 20-30 years of retirement.

    However, if you survive with reasonable health to FI, then you too may be able to enjoyable a leisurely 9 mile morning stroll in autumn sunshine whilst admiring the russet foliage on the braes either side of the path before catching a free bus home.


  10. @Grumpy Old Paul

    I didn’t notice GDP figures in the report, but the forward projections are based on ONS and OBT stats. GDP will be based on population and productivity projections I assume.

    There’s no reason for the Triple Lock to go. On current projections, the cost of the State Pension stays below 8% of GDP for the next 50 years.

    I’m (unusually for me) not such a sceptic about the whole thing. The government want to keep most people above the means-tested benefits line, and keep the cost below 8% of GDP.

    So long as they keep adjusting the SPA (starting age) upwards, they can do that.


  11. What a maze it all is. Because I left school and started work after O levels (remember them?), I have in fact now got 43 qualifying years under my belt and will get £10,000+ per annum at 66. I did both my degrees while working full-time, so didn’t take any time out of PAYE for study.

    The forecast is quick to tell me that I can never qualify for any more, lol 🙂

    They’ve changed the rules so many times for women my age that I feel pretty cynical about what they might do between now and then…



    1. But surely you are the poster lady for not being cynical about the state pension?

      If you started work in 1973 then your world has been full of turmoil such that a little bit of Brexit, a dash of inflation and a smidgen of tax cannot begin to touch.

      Your pension has been through the Oil Crisis in the 70s, never mind the $30 a barrel recently. You’ve seen wars – Yom Kippur, Afghanistan (more than once), Iran/Iraq (ditto), Kuwait, Falklands, numerous bits of Africa vs other bits of Africa, the Balkans and no doubt many more. Not to mention the general cloud of the Cold War where for 40 years we were just 4 minutes away from being turned into radioactive slag.

      You’ve seen the 3 day week and shopping by candlelight. You’ve seen the unions hold the government to ransom, and later governments almost remove unions from the business vocabulary. You’ve seen interest rates at almost 25%…and down almost to zero. You’ve seen Europe rise from the ashes of WWII, to reform, restructure, integrate, peak and teeter on the brink of implosion. You’ve seen a UK that was almost exclusively white and British-born morph into a melting pot of all races and creeds. You’ve seen people on the streets arguing that it’s a good thing. And on the streets arguing it’s not.

      You’ve seen the demise of the 8-track, the rise and fall of the LP, cassette, and CD. VHS and DVDs have come and gone. Cinema almost went but came back. You’ve seen the introduction and inexorable rise of the computer in business and personal life. And the internet? It would have been dismissed as utter fantasy in 1973 – even Dr Who (Jon Pertwee then) didn’t have it.

      You’ve seen our heavy industries of fishing, coal mining, ship-building and steel-making all go, to be replaced by call centres, “financial services” and the service sector more generally.

      When you started work you might have been paid weekly, in (newly decimalised) notes and coins, in a brown envelope collected from the Cash Office. Your payslip was probably hand-typed by the typing pool.

      You pension pot has weathered all of these, and today you’ll get over £10k a year for the rest of your life – a much, much longer span (on average) than was ever imagined when state pensions first came in (a pittance to last you a couple of years until you croaked). your pension pot is worth about £250,000, or over £5,000 for each year you’ve worked.

      Your state pension has weathered the tumultuous last 43 years with breath-taking success. Not because of this, or that, rule change, or this or that bit of growth. But because the UK, as a very wealthy nation, was never going to let someone who’d worked all their life and paid taxes not have a reasonable pension in old age.

      Will the next 43 years be the same? No idea. But I’m confident that the UK will not cease to provide for those who’ve worked and paid taxes all their life. I think we can all be certain that there will be some “old age provision” (whatever it might be called in the future) for everyone. There’s much to be cynical about in this world but I don’t think pensions are one of them. Not when you consider the things your pension (and you) has weathered since 1973…

      I certainly don’t think you need worry about the few years until you get your state pension.


      1. Ok, so now I feel *really* old… 🙂 On the plus side, l got to see Bowie, The Who, Cream, ELP, Led Zep, Free, Yes, et al when they still played smallish venues!

        Thing is, for decades of my working life I was told that I would be able to draw my pension from age 60. But that changed significantly, at the stage of middle age when you are not able to just shrug off a sudden step-change of 5 years. Oh, and then another delay 18 months after that, initially to 67 but now oddly to 66. That’s why I’m not holding my breath.

        That said, I am still going to be retiring at 60 – albeit under my own steam. Many women of my age were not as fortunate as I have been in terms of being able to build earnings (and savings) power, and they feel badly let down by the state pension changes which left them in the lurch financially.

        Ah – and the Dr who that sticks in my memory most is William Hartnell 😉



  12. I honestly don’t expect to receive a state pension by the time I reach the age. However, I do think I’ll end up making NI contributions post-FI if access to the NHS is contribution-based. In 10 years’ time… who knows, it very well may be. IMHO, as far as state benefits for the old go, leave to use the NHS at no cost will be far more important to me than a state pension.
    Oh well, I suppose that’s me stepping out of my circle of influence again 😉


  13. “assuming that the logical conclusion of Brexit isn’t a one-party state at some point”: why hass the Brexit vote caused so many people to lose so many dozens of IQ points?


  14. “When I started work you had to have 40 years of working life to earn a full State Pension”: for ages it was 44 for men and 39 for women. Was it ever 40?


  15. If a government wanted to jigger inflation-protection, it could revert to the antics of one of the pre-Thatcher Labour governments. I-P, it proudly announced, would be effected by linking the pension to the predicted inflation rate for the coming year. Then they routinely underpredicted that inflation rate, and never added any retrospective correction for the error.


  16. Thanks for a very timely and helpful post – I only yesterday looked up my pension estimate on the .gov website. It is much clearer than when I looked last year before the recent changes were implemented. Lots of helpful clarifications in the comments too so a great thread, but although a lot of bafflement has been dispelled there are still some puzzlers for me.

    One is, for example, that I have a few more quaifying years than you, Ermine (38) but my current pension estimate on years to date is a bit lower than yours (£120 p/w) but on the other hand though I still have 5 years to contribute up to retirement age, the estimate if I contribute in all years is below the £155 p/w at £142 p/w – which is £120 + 5*£4.45.

    I can only think this is because I have had more contracted out years in my 38 than you in your 30. There is no indication in the .gov NI contributions details page which years were contracted out, but maybe it is there somewhere.

    I am earning a bit (~3.5k) by music tuition a few hours a week, but chose to set up a limited company to do this through, thinking I might grow this business a bit. Can’t be that arsed, as it turns out, but not sure where that leaves me with respect to NI. I think I will go down the route of waiting until the last possible minute then buying the years in bulk through Class 3 voluntary contributions on my retirement date, which the very helpful guide you linked to suggests as a reasonable plan.


    1. I had 20 years contracted out. However, I have some years additional SP or state second pension, something like that. I was earning reasonably at the BBC and came out of the FSPS (it was only five years in two broken up periods) so was uncontracted out. I can only assume those additional SERPS contributions offsetted a bit the contracted out hit. I also had three years credited while I was a child in the upper fifth and sixth form, I guess these were also not contracted out.

      Presumably if you have a limited co then you get paid income as dividends, which I guess don’t count as income in the same way as the dividends from my unwrapped holdings don’t count. Why not teach a couple of sessions as a sole trader this year and next, declare the income of say £100 and voluntarily pay your Class 2 this year (2015/6) and next (2016/7) – two years or £1400 worth of Class 3 for a cost of ~£300 😉


  17. Bear in mind that I think that SERPS (1978 – 2002) and the State Second Pension (2002 – Apr 2016) only affects the calculation of your pension under the old rules, while contracting out only affects the calculation of your pension under the new rules.

    I’ve now dug out my paperwork so I can give an example.

    To Apr16 I have 27 years NI for state pension purposes including the three free years of when I was 16, 17 and 18.

    Under the old regime my pension is 27/30 * £119.30 + £19.23 = £126.60

    The old rules use 30 years as the maximum. £119.30 was the maximum weekly amount of pension under the old rules. £19.23 is the amount of SERPS/S2P I have banked (for years when I was not contracted out). It is not possible for me to calculate the £19.23 – it was just a figure from the (old, hard copy) pension estimates.

    I also got a statement under the new rules. The hard-copy statements don’t give the “forecast” element (£155 for most of us) that we’ve seen online but only the amount I’ve banked to date using my 27 years. (Confusingly the hard-copy statement says it is a forecast of my pension when I reach SPA but only using my contributions to 2016.)

    Under the new rules my pension would be 27/35 x £155.65 = £120.07, which would then be reduced by an (unknown to me) amount because I think I was contracted out between 1992 and 2009. (While HMRC says it knows I was contracted out I can’t find which years it thinks this relates to.)

    However as the £120.07 (less unknown contracting out amount) is lower than the £126.60 calculated under the old rules the new pension statement tells me my pension is £126.60. The statement does not tell me that it is the old rules that apply in arriving at this amount.

    The online (but not paper) forecast (at 2034 using assumed contributions to then) gives me the £155 that we’ve seen before.

    If I work to SRA (2034 for me) I will have 45 years of NI contributions. I need 35 for a full pension under the new rules but I was contracted out for 17 of those. I’m not sure why my forecast is the full new basic state pension as I’d have 28 “proper” and 7 “contracted out” years so would expect some deduction. However I’ve read that the CO deduction only applies to 2006, even though CO carried on until 2012. If so that would give me 14 contracted out years so 31 “proper” and 4 contracted out – I’d still expect some deduction…

    The online and paper versions tell me my COPE is about £42. It is not clear whether this £42 would be the amount deducted from the £120.07, above. Oddly the paper statement says “if your COPE amount increases…[you might get a lower State Pension]” Not sure how this can be as my contracted out record is unchanging. Perhaps they recalculate somehow each year… I’ll know when I get next year’s statement.

    If I keep working my “Starting Amount” (as it’s called) of £126.60 (being the higher of the two calculations at April 2016) will eventually be eclipsed by the new state pension as I count more NI years using the higher new state pension rate. I cannot estimate when this will be as I don’t know how to calculate the CO adjustment.

    I’ll simply get annual statements. I presume they’ll show £126.60 (uprated by the Triple Lock, and reduced for a revised COPE?) until one year it goes up by more than this. Then I’ll know that I’m on the new rules. When that happens I may be able to infer what my CO deduction is/was.

    At present my financial models only use the £126.60 pw (£6,583 pa) that I’ve banked. At least I think I’ve banked it…!


  18. Ermine, great thought provoking post as always. I seem to be on the full amount, having 36 years in total.

    On a related note, have you looked into taking your pension from The Firm and transferring it into a SIPP? There are any number of articles out there at the moment showing that many big company schemes are offering 30, even 40 or more times forecast annual pension as a transfer value. I don’t know what The Firm are offering, as I have not checked yet, but if they are offering say 30 times, on £20k per annum that is £600k. 4% dividend from a tracker or set of investment trusts is £24k per annum, and you get to own all the capital, leave it to your wife on death, or even draw down as the grim reaper approaches.

    A bit risky, but is it any more risky than assuming the company stays solvent for the next 30 years, and pension rules don’t change before you hit 60?


    1. I recently got a quote from my firm – it was a 23 times multiple, so not the no-brainer 30+ times that have been reported.
      However, even at 23 times I’m thinking about it. I still have 18 years until normal retirement age, and over that period my defined pension can only grow by an inflation measure (and even that is capped.)
      Whilst there are definitely no guarantees if I invest it myself, if I averaged, say, 2.5% real growth P.A., it would be worth a multiplier of 35 at retirement age.
      Obviously I’d be taking on all the risk, but I have to weigh this against the risk of high inflation and the impact on my deferred pensions, and the risk of the scheme benefits being devalued in the years to come (there has been recent talk about defined benefit schemes perhaps reneging on previously legally ‘guaranteed’ benefits, as a way of reducing their funding deficits.)


      1. 23x … with 18 years till normal retirement age? That’s really not bad at all. At a 3% inflation rate, that implies an investment return (discount rate) of 5% and capitalisation at 3%.

        We got CETV for my partner’s very small defined benefit pension (worth in today’s terms around £11k/year). Pension age is 23 years away. The CETV multiple was just 6.5x the current value. At 3% CPI and a 3% capitalisation, that implies an investment return of 11%. I asked the idiot on the phone to justify their CETV but they couldn’t nor was I allowed to talk to an actuary. We’d happily take 20x and would consider 15x, given it’s not a hugely useful pensionable amount, the flexibility it would give us (inheritance etc) and that small fact that their funding deficit is about 30%!


    2. > have you looked into taking your pension from The Firm and transferring it into a SIPP?

      I transferred my AVCs into a SIPP, and I’ve using that right now. But I am much closer to drawing my FSP than you are – 4 years or so. It’s the time-honoured search for the old cojones of steel. I have a 100% equity based ISA. When the next crash comes, I am gonna be the sucker that goes down, all the way to the bottom – 50%, 60% drawdown. oy vey, that ain’t gonna feel good at all. We all know it’s on the way…

      Normal people go for a mix which would be getting on for 50:50 equities to bonds at my age. I have no bonds, zero, nada, because my FSP is my bond. Now I may choose to commute up to 25% of it and take a tax-free lump sum and invest it, because I really don’t like paying tax, and I am toying with taking it a couple of years early to reduce tax. Mrs Ermine will inherit my ISA and half the FSP on my death, which should basically see her right. The SP is another bond-like asset, which is why I can take such a cavalier attitude to equity risk, while accepting that it will feel like wrestling an angry bear in a dark cave.

      So would I shift that FSP to real money I can invest? Well, what in? If somebody gave me a load of cash now I would be scared as hell to put it in the stock market, because we gotta take a hit in the next few years – Trump, the absurd valuations of it all particularly the US market that is > 50% of global indices, the Euro finally blowing (yes, I know, I’ve called the last 10 of the zero times that has happened, but it has to happen one day), the unknown unknowns.

      Then there’s the fact that nobody has an idea of what a pound is worth, because our dear departed genius Cameron asked people an open-ended question and most of them said “Hell Yeah, let’s do it” with nobody knowing what ‘it’ actually means is bar the fact they really hate seeing people wot look and talk funny on this septic isle even if they are shovelling shit, picking our fruit and veg, keeping the NHS running and staffing every care home in the land.

      So no, I don’t really want to do more equity investing into this market with this currency over and above my £15k a year because I doubt my competence to do better than an inflation-linked-up-to-a-point annuity. True, I may curse those buccaneering Brexiteers if we have several years of inflation over the inflation cap on my FSP, because that will devalue it in real terms cumulatively by the excess. I know I’m going to take a sting somewhere. But I probably don’t actually need any greater equity exposure, I don’t believe in BTL and property, I have as much gold as I really want to have, cash pays no interest without unusual property-based risk in the case of P2P. I lack the balls…

      Now if I were a young fellow like @Scott, I’d consider it. But my investing career is almost over, so it’s steady as she goes.


      1. Yeah, fair points, and essentially the same reasons why I have not yet made the call to get the transfer value, lest the number fall into a tempting bracket such that I feel I need to do something about it!

        The key here, though, (intellectually, not easy in the heat of a meltdown) is that if the number is such that a 3.5% income, via a mix of dividend yield, bond yield, corporate bond yield, is the same or more than the pension, then it must be worth very serious consideration. Income typically does not fall or rise anywhere near as much, nor as often, as capital values. The % yield does of course move a fair bit, in line with the capital changes, but over very long periods of history the income from a diversified portfolio is pretty consistent and rises ahead or inflation. If the capital halves, the income will fall, for sure, but even in the worst of times it has always recovered pretty quickly. There are several investment trusts that have increased their dividend ever year for almost a century, albeit by using internal retention methods to smooth the flow. You sacrifice some return to that and to fees, but that could be the extra sop to risk aversion.

        So, it is all about risk aversion, big balls, and safety margin. If you need £20k come rain or shine and your income generated is £20k and a bit, then for sure it is a pretty safe bet you should stay with the safe bet.

        My main issue with it all is if I can get the same or more and also own the capital it is really tempting. But, as you say, it is a hard one to bet on, so I most probably will not end up doing it.

        Two final two thoughts to throw out there – I am actually going to be taking my pension next year, as I am not going to wait to 60. Bird in the hand and all that. Also, I note from your above reply and previous posts that you are drawing down your AVC instead of doing that. I have planned to take the pension and take the AVC money as tax free as part or maybe all of the TFLS, that dependent on how much extra pension I could get by giving up the regular TFLS. I have a year almost to the day to figure this one, so need to dust down excel and get scenario planning!


      2. There are some hidden assumptions in there, however. One, of course, is that past performance is indicate of future results, and you really aren’t meant to think that, despite the entire intellectual argument of the EMH being based on that, though more reversion to the mean as opposed to projecting forward which is what everybody thinks when they infer future results from the past.

        I personally don’t believe in the EMH always applying, but I have equity capital and DB capital in a reasonable mix, and so exchanging DB for equity would shift me to a higher-risk part of the efficient frontier. I ain’t got the cojones of steel to think myself a talented enough investor to offset that. If someone had an unusually low amount of equity relative to DB pension the balance might be different. If they were younger it would be different, too.

        I have planned to take the pension and take the AVC money as tax free as part or maybe all of the TFLS, that dependent on how much extra pension I could get by giving up the regular TFLS.

        That was my original plan, and had the stock market been deeply titsup that would still be the way to go. But valuations are terribly high at the moment, and since you only reach NRA once, you gotta play the hand you are dealt. If I am 60 and the stock market s on it’s knees, I’ll commute 25% of my FSP to pay less tax and buy into the suckout. Probalby, assuming I have the cojones… I suspect that won’t be the case, and loads of funny money sloshing around makes equities more risky IMO

        For me, given my beliefs and talents, on the current balance I believe preserving fixed income relative to volatile income favours the former at the moment. But I might be wrong . Brexit threw a curveball in the amount of inflation coming down the pike, which eats fixed income for breakfast. Weimar Germany is the poster child – if you were in equities, and you could hold across five years, you got to walk away, whereas a DB pension would be worth diddly squat. I want roughly equal amounts of both options.

        I’ve been a successful equity investor since 2009. But sadly what I learned since then is that I know that I don’t know. I don’t know how to replicate that into the next shitstorm, and that makes me value alternatives. YMMV. Many people are drawn to the high CETV of DB pensions, but you hafta ask yourself, why are they offering you so much money to get out of their obligations to you 😉


  19. @Ermine – good idea about doing some teaching sessions as a sole trader. I’ll look into it. I’d thought of maybe doing lunchtime bar work or something for a bit but that sounds more up my street.


    1. hehe – you may as well play to your strengths. The self-employed you can presumably contract to supply services to your company.

      To an erstwhile lifelong PAYE monkey like me self-employment looks like the most bizarre method to munge anything into anything to feed the Beast what it wants to see. You only need to do one teaching session and declare the profit or even loss if you had to drive 100 miles to teach it. Voila, instant entitlement to pay your £150 SP topup for the year. No wonder the gov is pissed off about it

      as this is a loophole which people have been exploiting to avoid paying class 3, it will be scrapped from April 2018. Only class 4 will then be payable, on profits over the limit. If your profit is below then you will have to pay class 3 in order to build up pension entitlement.

      Kinda seems rude not to take ’em up on a couple of years of it 😉


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