If you were ‘contracted out’ you won’t receive the full state pension amount. Instead part of your state pension will be paid by your private pension scheme. It’s called COPE or the contracted out pension equivalent. Find out how COPE works and what it means for your state pension.
Is COPE deducted from my state pension?
If you were contracted out of SERPS (the state earnings related pension scheme) you and your employer paid a lower rate of National Insurance than people who were not contracted out. In return, your employer’s or private pension was meant to replace the SERPS part of your pension.
SAVVY TIP: Under the old basic state pension system, which was replaced in April 2016, what was often referred to as the ‘full state pension’ was the basic amount. Any pension you built up under SERPS or the state second pension was on top of that. Not everyone was entitled to a SERPS payment.
Under the new state pension, often called the ‘single tier’ or ‘flat rate’ state pension, the full amount, is made up of both the old basic state pension and the SERPS or state second pension. They’ve been combined into one amount – which is £164.35 a week in the tax year 2018 – 19.
So, if you’ve been contracted out you may not receive the full ‘flat rate’ state pension amount from the government. Not unless you were only contracted out for a short time and you have 35 years of NI where you weren’t contracted out. That’s because the COPE amount is deducted from this total. The COPE figure should be paid either by your employer’s pension scheme, or by your personal pension.
Was I contracted out?
If you were in a final salary (otherwise called ‘defined benefit’) pension you will have been contracted out. If you were in a pension pot type of scheme through your work, which may have been called a money purchase pension, a defined contribution pension or a group personal pension, then you may well have been contracted out. You may also have been sold a personal pension by a financial adviser or pensions company, specifically for your National Insurance rebate. These plans were quite aggressively sold in the early 1990s.
Am I still contracted out?
No. Contracting out was abolished for salary-related pensions on April 6th 2016, and for personal and pension ‘pot’ type of workplace pensions from April 2012.
How do I find out how much my COPE figure is?
Your COPE figure should be on your state pension statement, whether you get that online or on paper. If you have a paper statement, it’s on page two. It’s described as a COPE estimate.
If you’ve been a member of two or more different pension schemes and were contracted out of both of them, the COPE estimate will be the sum of the pension you should receive from all those schemes. This sum will be deducted from your state pension.
Will I get the COPE amount?
Not necessarily. It will depend on the type of pension scheme or plan you were in when you were contracted out.
Final salary schemes
If you were in a final salary or other salary-related pension, then the pension scheme had to promise to pay at least as much as you would have received from your SERPS state pension. This is called the guaranteed minimum pension (GMP).
SAVVY TIP: The guaranteed minimum pension only applied to the years you were contracted out between 1978 and 1997. Between 1978 and 1988 your pension scheme had no duty to increase your GMP to take account of inflation. From 1988 onwards, it did, although there was a cap of 3%. Depending on how the GMP increase was calculated (some schemes used a fixed rate), you may be due to receive more from your GMP than you would have done under SERPS.
Defined contribution or money purchase schemes
If you were contracted out through a pension pot type of workplace pension or if you were sold a personal pension into which your National Insurance rebate was paid, the amount you get from this pension may be less than the COPE amount. How much you get will depend on the levels of charges in the pension and how well investments have performed. There was no guarantee that it had to replace the SERPS part of the state pension you’d have lost.
SAVVY TIP: Many thousands of people were encouraged to take out personal pensions to pay in their National Insurance rebate and in some cases were mis-sold their pensions. They were promised a bigger pension by contracting out of SERPS and taking out a personal pension. In some cases it materialised but in others it didn’t.
How to reduce your COPE deduction
If you’ve been contracted out, you can pay extra National Insurance, even if you have already paid 35 years of NI, to reduce the COPE deduction. This means you can increase the amount of state pension you’ll receive when you reach state pension age. You won’t need to do this if you have 35 years of National Insurance and you have never been contracted out. In that case you should get the full flat rate state pension amount.
But if you have already paid or been credited with 35 years of National Insurance, but some of that time was while you were contracted out, you won’t receive the full state pension amount from the DWP because some of it will be paid either by your personal pension. You can make extra NI contributions to reduce that COPE deduction. However, you can only reduce the COPE deduction if you pay extra National Insurance for the years from April 2016 until you reach state pension age. If you try and pay extra NI for years before April 2016, it won’t reduce your COPE deduction.
A year’s extra National Insurance will cost £761.80 for tax year 2018 – 19. It’s less for earlier years. For that, you get an extra £4.69 a week (£164.35 divided by 35). That works out at an extra £243.88 a year. You will break even in a little over three years.
How to pay voluntary National Insurance contributions