From November 2015, Department for Work and Pensions (DWP) are including a Contracted-out Pension Equivalent (COPE) amount within State Pension statements.
This estimated amount (COPE) has been introduced to help customers, who’ve been contracted-out. It will help you see how National Insurance contributions paid before 6 April 2016 will contribute to your overall pension income.
Because you paid lower National Insurance contributions (NICs) to the State system, you may not be entitled to the full amount of new State Pension. However, as well as paying lower NICs, someone who is contracted-out will have contributed to and built up some private pension to replace part of their State Pension. Therefore, they should receive some of their pension income through a different route. In most cases, the workplace or personal pension scheme(s) should include an amount that is at least equivalent to the additional State Pension you would have got if you hadn’t been contracted-out. This is known as the COPE amount.
Below is key information that explains more about COPE and why it’s being included in State Pension information.
The Contracted-out Pension Equivalent (COPE) amount
Under the current State Pension system people with sufficient NI qualifying years can get the basic State Pension and also build up entitlement to the additional State Pension (called State second Pension (S2P) /previously called State Earnings Related Pension Scheme (SERPS)). Many people have been contracted-out of the additional State Pension. For those who reach their State Pension age after 5 April 2016, the new State Pension replaces both the basic and the additional State Pension.
People who were contracted-out of the additional State Pension either paid lower NICs or some of their NICs was instead paid into their workplace or personal pension. To take into account that they have paid less into the NICs system, the amount of State Pension they’ll get will be lower than that received by people with similar earnings who were not contracted-out.
However, in most cases, the pension they get from their workplace or personal pension(s) should include an amount equivalent to the additional State Pension they would have got if they hadn’t been contracted-out. This is known as the COPE amount. Their total private pension could even be higher.
The COPE amount set out in the statements is based on all periods of contracting out. If someone has been a member of more than one scheme that was contracted out, the COPE amount represents all those schemes.
The amount on State Pension statements
DWP are introducing the estimated COPE amount to help people realise that they opted out of some of their State Pension when they were contracted out. This should help them understand why they may not be entitled to the full amount of new State Pension if they have been contracted-out. They will receive some of their pension income through a different route as they were required to build up a private pension instead.
Payment to customer
The amount customers get from their workplace or personal pension scheme(s) will be at least equivalent to the COPE. The COPE amount will usually be paid as part of their total pension benefits under the scheme, and not identified separately.
The date when they receive their workplace or personal pension, and the full amount they receive, will depend on the rules of their scheme(s) and may also depend on any investment choices made.
You may not receive the full COPE amount, in most cases a customer’s workplace or personal pension scheme(s) should include an amount that is equivalent to the COPE amount shown in their State Pension information.
If you belong to a workplace final salary scheme you are likely to receive more than the COPE amount shown.
However, if you’ve been a member of a workplace scheme where the amount of pension is based on your salary (i.e. Defined Benefit, Final Salary or Average Salary schemes), there can be circumstances where you may receive less than the COPE amount. This may be if:
- the scheme had financial difficulties and is underfunded; or
- the rights were transferred to a scheme that wasn’t linked to salary. The investments in that scheme didn’t perform well. For instance, under the pension flexibility reform that was introduced in April 2015, you may take some or all of your pension pot as a cash payment. The amount you take will affect your pension income amount – and if you decide to take all of your pension pot as a cash payment, you will not get any pension income.
- If you use your pension investment to buy an annuity that provides a regular pension income, the type of annuity you buy will also determine your pension income.
- If you are, or have been, a member of a workplace pension scheme where the amount of pension you get isn’t linked to your salary (i.e. Defined Contribution, Money Purchase scheme), or if you are a member of a personal pension or stakeholder scheme, the actual pension amount you get will depend on the performance of your investment (i.e. where your pension pot is invested and how much these investments have increased), and the choices you make.
Customers who’ve divorced or dissolved their civil partnership
Its important to be aware if you have divorced or dissolved your civil partnership, and the courts have awarded a share of their workplace or personal pension to their former partner as a result, their workplace or personal pension income may be lower.