Client questions

When personal pension plans came into being in the late 1980’s, many individuals decided to "contact out" of what was then the State Earnings Related Pensions Scheme (SERPS). Most should now consider contracting back in.

The pension you get from contracting out depends on:

• How much your investments earn
• The charges on your pension fund
• The cost of buying a pension (i.e. the annuity rate at the time of retirement)

The Government makes assumptions about all of these things when calculating what the rebates will be. We can’t, of course, predict the future but if the Government’s assumptions are all correct, your pension from contracting out will be very similar to your S2P. The rebates are therefore deemed to be ‘neutral’.

Many insurance companies have recently written to their pension clients urging them to contract back in to S2P. Some have even removed the ‘do you wish to contract out?’ question from their pension application forms. The insurance companies’ stance is largely due to the historically low interest rates, low annuity rates and volatile investment returns that we are currently seeing.

There are still a number of compelling reasons why contracting out might be the right choice for some of our clients and it is essential to make a carefully thought out decision each tax-year. Some of the plus points of contracting out are:

• Flexibility
• Better death benefits for unmarried people
• 25% tax-free cash at retirement under the post A-day rules
• Earlier retirement than contracting in

The vast majority of people in the UK should be contracted in to S2P as this provides a low risk, guaranteed pension. Contracting out should only really be considered by those who are likely to have plenty of other funds to draw on at retirement.

Evolve - November 2009