COPEing with the Urban Coyote

by mark | 3 Jul 2023, 8:47 p.m.

I recently looked at my State Pension Forecast. There was a reasonably alarming statement 

• Contracted Out Pension Equivalent (COPE)
• Your COPE estimate is £x.yz a week

What is this? Well there was a bit of archaeology to do here. Below are my working notes. 

New State Pension

On 06 April 2016 the New State Pension came into force. You earn 1/35 of the full amount for every Qualifying Year (broadly, complete National Insurance year) you have after that date. Neat. But what about the older stuff? Well first you need to understand how the old stuff was calculated. This is the "starting amount" on to which very simple 1/35ths are added. 

Old State Pension

There was a myriad of older state pensions.

• Basic State Pension - similar to New State Pension, pay NI for a year to get get an increment of this (was recently 30y for full accrual)
• Graduated Retirement Benefit - ancient top-up pension that basically no-one gets and is so old I won't mention it again
• State Earnings Related Pension Scheme - here is where it gets interesting. From 1978 through 2002, you earned, over a full working life, a 20% top up based on a band of earnings. A full working life was from age 16 to state pension age. 
• State Second Pension - from 2002 through 2016, this was similar to SERPS but with different rules - e.g. a banded 40% / 10% / 20% accrual designed to make it more valuable for lower earners, eventually with flat rate accrual at the lower bands. 

You got NI Credits for some circumstances (e.g. staying in school for up to 3y after age 16). Also, you could "contract out" of SERPS and S2P in some circumstances, normally if you were in a defined benefit pension, where you paid lower NI and accrued no SERPS/S2P. This was the state subsidising your DB pension. 

To value your pre 06 Apr 2016 NI credits for state pension purposes, a few calculations are made. 

• First, your old state pension + S2P + SERPS entitlements are calculated.
• Second, your old state pension + S2P + SERPS entitlement is calculated as if you never contracted out and paid full NI instead. This is usually a bigger number. The difference between the first and second numbers is the COPE.
• Third, your old years are applied to the new rules. So if you had 20 years prior to 2016, you get 20/35 as the old pension amount. The COPE is deducted as well. 

The larger of the first and third numbers is used. So, if you contracted out (you usually didn't have a choice), you paid less NI and the value of your pre 2016 NI years is lower than your post 2016 NI years. 

Combined

You have post 2016 years which give you 1/35 of the full new state pension amount. Your pre 2016 years can be worth more or less than 1/35 depending on whether you were paying lower NI via contracting out (but see your DB pension you got in exchange). If you were contracted in you could have old years worth more than 1/35 as you get additional credits for SERPS and S2P. 

The COPE, as far as I can tell, only applies to the pre 2016 years. It is an adjustment applied to the starting amount for the years you were paying less NI. You can still earn up to the max by adding more qualifying years of NI. 

I tried calculating my COPE from my own incomplete records. Remarkably I get very close (within 1%). Issues:

Gotchas

The NI rebate for contracting out was flat rate but the S2P foregone was not. So if you earned below the breakeven point, you actually accrued a sliver of S2P to reflect that S2P was proportionately more valuable than the NI rebate below this level of earnings. The level of the sliver is the gap between SERPS style 20% accrual and S2P nonlinear accrual.

After some point the percentage of earnings accruals were replaced by flat rate accruals for the benefit of low earners and the scheme overall became less generous. 

You have to look up the revlaution of earnings order to adjust from the 2015/16 value to the latest value if you want to match the number shown on the state pension forecast. 

I've put together the following table of magic numbers you can use if you want for S2P calcs. 

Tax year	LEL	LET	SET	UEL	UAP	Flat Rate
2002/03	3,900	10,800	24,600	30,420
2003/04	4,004	11,200	25,600	30,940
2004/05	4,108	11,600	26,600	31,720
2005/06	4,264	12,100	27,800	32,760
2006/07	4,368	12,500	28,800	33,540
2007/08	4,524	13,000	30,000	34,840
2008/09	4,680	13,500	31,100	40,040	40,040
2009/10	4,940	13,900	31,800	43,875	40,040
2010/11	5,044	14,100	32,200	43,875	40,040
2011/12	5,304	14,400	32,600	42,475	40,040
2012/13	5,564	14,700	33,000	42,475	40,040	88.40
2013/14	5,668	15,000	33,700	41,450	40,040	91.00
2014/15	5,772	15,100	33,800	41,865	40,040	92.00
2015/16	5,824	15,300	34,300	42,385	40,040	93.60

Up to 2010, you got 40% on LEL to LET, 10% on LET to SET and then 20% on SET to UEL (UAP for last two years). For 2010/11 and 2011/12, you got 40% for LEL-LET and 10% up to the UAP. For the last stretch, you got the flat rate for any earnings above LEL and then 10% on LET-UAP. This is based on lifetime earnings, which are from age 16 to state pension age. You get 1/(state pension age - 16) times accrual.

There are arcane indexing rules - you need to revalue to 2015/16 amounts, calculate, and then revalue to current tax year.