contracting out of Second State Pension

beefturnmail

Due to changing jobs very soon, I have recently started thinking about pensions and I'm finding it very confusing - Any help or advice will be greatly received!

I'm 24 and have been in full-time employment for 2 years - I don't have any pension currently but have been paying NI for 2 years. My new job is offerigna final salary Pension (SAUL) wherby I contribut 5% of my salary and my employer contributes an additonal 10.5%. I would receive 1/60th of my final salary if I stay there till I retire! However I would also contract out of the second state pension and pay a reduced amount of NI.

My question is - what are the consequences of doing this? What happens to the money I've paid in when I leave this new job? - I can't envisige staying at the job till I retire! Will I then have to contract back in to the state pension? Am I still entitled to the basic state pension anyway by paying a reduced amount of NI?

Is it best to not join the pension scheme at my new job and put the money towards saving to buy a house?

As you can see I'm pretty confused!

dunstonh

You dont contract out to make any more money.

You contract out only if the reasons are suitable. Such as, different death benefit requirements, wanting a tax free lump sum, wanting to commence benefits at an age other than state retirement age (whatever that ends up being) or not trusting the Govt will keep the benefit in place in the future. You contract out for those reasons and accept that you may be losing a couple of pound a week for those reasons.

Is it best to not join the pension scheme at my new job and put the money towards saving to buy a house?

1/60th final salary - get in whilst you still can. This type of pension is highly desirable.

Its easy to say should you do one or the other. However, in reality, you should be doing both. There is little point saving for a house deposit, then buying the house only to get to retirement to find you cannot afford to keep the house (many pensioners are selling all or part of their house because they didnt save enough for retirement). 5% is nothing as far as cost goes.

One thing you need to check and that is the contracting out arrangements. Often with final salary schemes, contracting out means something different to personal contracting out of S2P. The scheme may be contracting you out but not for you to benefit but to cover the some of the occupational pension. (trying to keep the wording of that very very simple and understandable rather than being 100% technically accurate).

crossleydd42

I assume you mean 1/60th of your salary for EACH year you work there (40/60ths or 2/3rds yr final salary when you retire (plus a lump sum of 18th months final salary?). You should NEVER pass up the opportunity of an offer like this - these sorts of pensions have almost disappeared to new employees and for many existing ones, too. Any private pension you went into later would only include YOUR salary. Even if you did leave later, they could not take what you'd earned to that point, which you'd draw when you reached their retiring age. The mortgage situation is a separate issue, but do not let this influence joining the pension scheme.

MrChips

As has already been said, this is a very good pension offer which most people (including myself) would definitely take up. 5% of your salary is a very good deal, and to match these pension benefits yourself in any other sort of scheme would require considerably higher contributions on your part. Personally I am paying about 15% and still would expect a lower pension (as a proportion of final salary) than you. Don't forget that this is a 5% contribution taken out before you get taxed, so the actual difference to your "take home pay" will be less than this.

To answer your question about what happens if you leave the company in the future, you will get 1/60th of your "final salary" for each year you are in the scheme. If you leave before retirement, you still get 1/60th for each year you are there, but your pension entitlement is then frozen until you come to retirement age (strictly speaking it isn't actually frozen as by law it must be increase in line with inflation during that time).

This company pension will be in addition to state benefits. If you are contracted out you will still be eligible for the basic state pension but will forgo the state second pension, and will pay lower national insurance contributions as a result.

Hope this helps clear things up.

Brewster_2

I have a Sunlife Personal pension rebate only policy, which was originally taken out in 1987. It states contracted-out date 6.4 1987. The last payment made into the policy by the DSS was 6th October 1992. I joined the NHS in 1991. Could that have had anything to do with the reason why no more money was paid into the plan?
The reason given in a letter from Sun Life in 1993, is that the DSS informed them that I had contracted-out of SERPS (Yet, I am not sure why I contracted-in let alone when I contracted-out) and that for the tax year 90/91 my employment did not qualify for minimum contributions.
I would like to know whether Sun Life is still operational i.e. not merged? Do these types of plans increase in line with inflation? What would the plan be worth now? The last schedule shows Managed pension fund - number of units 280.54 and bid price year 1992 was 877.0p and the bid value = £2,460.34 at 27/11/1992. It is a Protected Rights Account - The notes at the bottom of the schedule reads: Contributions representing Contracted Out Rebates (together with amounts received in respect of Incentive Payments and tax relief on the employee's part of the Rebates) are applied to the 'protected rights account'.

Is there anything I can do with the money in the policy assuming that it may have grown or will I have to wait until I am 65 (another 16 years to go - my time flies)

Sorry there are a few questions I need answering, but these forums have opened up a gateway for all the questions I wanted to ask but never knowing who to ask let alone trust.


I need someone's help?

oceanblue_3

Brewster wrote:

Is there anything profitable I can do with the money in the policy assuming that it has not grown?

I need someone's help?

If I were you, I would write to Sun Life to ask them to review the policy to ensure that you received best advice at the outset: it is possible you would have been better off staying contracted-in to SERPS.

Write to them at this address:

AXA Sun Life
AXA Centre
PO Box 1810
Bristol
BS99 5SN

Brewster_2

Thanks for the information Oceanblue, I had gone back to edit the post to make sure it read correctly and found that you had responded - my that was quick!

How would I have been better off staying contracted in and is there anything I can do about it now?

Brewster_2

Ocean Blue, I have the above policy plus 3 other little policies with Standard Life can they be placed into SIPPs, such as Bells Sipps deals for placing little pensions into one place?

oceanblue_3

Brewster wrote:

Thanks for the information Oceanblue, I had gone back to edit the post to make sure it read correctly and found that you had responded - my that was quick!

How would I have been better off staying contracted in and is there anything I can do about it now?

Taxi duty tonight - the joys of parenthood!

It is possible that, had you remained contracted-in to SERPS, you would have received a larger income in retirement. You can request a review from AXA Sun Life, and they may decide that you need to be compensated; typically this would be via a compensation payment into a redress policy that runs parallel to the original policy.

Brewster_2

Thanks for the information Oceanblue, I had gone back to edit the post to make sure it read correctly and found that you had responded - my that was quick!

How would I have been better off staying contracted in and is there anything I can do about it now?

oceanblue_3

Brewster wrote:

Ocean Blue, I have the above policy plus 3 other little policies with Standard Life can they be placed into SIPPs, such as Bells Sipps deals for placing little pensions into one place?

A Protected Rights policy cannot, under current legislation, be transferred to a SIPP.

Standard Life is likely to demutualise next Summer and, as a result, any investment you have with them in a With-Profits fund is likely to earn you free shares. Of course, if this is not important to you, then you may well be able to transfer the three smaller policies to a SIPP. One question, though: what reasons do you have for selecting a SIPP rather than a Stakeholder or Personal Pension Plan?