Readers’ surgery: The state pension, contracting out, deferrals and the new flat-rate pension answered

6 min Read Published: 08 Apr 2011

 Reader’s Question 1

What happens to your state pension if you have you to stay in hospital for a time?

My Answer

I’m assuming that you are currently receiving your state pension. In which case, the answer to your question is that you will carry on receiving your State Pension while you are in hospital. Any additional pension (SERPS or second state pension) will also be unaffected by your stay in hospital.

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Reader’s Question 2

I am due to receive my state pension on 6th Sep 2014. If I defer payment for 1 year, will I then receive the proposed higher flat-rate pension which takes effect in 2015 financial year?

My Answer

Unfortunately the answer is no. The proposed new flat-rate state pension will not be available to ‘existing pensioners’. “Existing” in this context means either those already claiming their state pension or those who will be entitled to claim by 2015/16 (i.e. those who will have reached their state retirement age).

So if you reach state retirement age before the proposed pension changes come in there is no scope for you to defer taking your state pension in order to benefit from the new flat-rate state pension. If you do defer then you will still fall under the current regime. Obviously the position could change but is unlikely to.

For more information on the proposed changes read my article The new flat-rate pension proposals in bullet points.

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Reader’s Question 3

Does my state pension go towards a profit in my business?

My Answer

No, the state pension has no impact on your business profit. It is classed as taxable income so you will need to bear that in mind when submitting your tax return.

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Reader’s Question 4

Should I opt back into SERPS?

My Answer

For the benefit of other readers the additional State Pension (formerly called SERPS) is provided by the government. It can give you extra money on top of your basic State Pension and is based on your National Insurance record and earnings.

However it is possible to contract out of the additional State Pension via a pension plan. By contracting out, instead of building up entitlement to the Additional Pension an individual will instead transfer that pension liability to a private arrangement.

Whether it is in someone’s interest to contract out depends on their individual circumstances, for example, the self-employed are not eligible for the State Second Pension so consequently the issue of contracting out is irrelevant.

The whole contracting in/out issue is such a contentious one that I know of a lot of financial advisers who refuse to advise on the issue.

So should you opt back into SERPS? Well obviously that depends on your circumstances. But in any event contracting out through a defined contribution schemes (i.e. money purchase, personal pension and stakeholder arrangements) is to be abolished from 6 April 2012. So you will only be able to stay contracted out for another year anyway.

But to answer the question as to whether you should opt back in now the pension advisory service provide a handy tool to help you to decide.

Click here to use the Contracting-Out Planner

The next readers question raises the interesting point as to whether it’s worth being contracted in anymore given the proposed changes to the state pension system.

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Reader’s Question 5

I pay into a personal pension. Initially I contracted out of SERPS and the government paid money into my pension pot. When I was 50 I was advised to contract back in to gain the maximum benefit in my state pension. Now we are all going to receive the same flat rate pension, can I contract back out again and will the government pay contributions into my pension fund again

My answer

As stated in the answer to the previous reader question, contracting out through a defined contribution schemes (i.e. money purchase, personal pension and stakeholder arrangements) is to be abolished from 6 April 2012. So you will automatically be contracted back in from next April anyway. But yes you can contract back in now if you wish.

Bear in mind that the state pension changes are still in the proposal stage (although looking likely to go through).

 

Enjoy the weekend sunshine and best wishes

Damo

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