SERPS again!

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
12 replies 1.1K views
superhoopsuperhoop Forumite
314 Posts
Part of the Furniture 100 Posts Combo Breaker
✭✭
Hi everyone - I'm finally de-lurking on this board as I could do with a few pointers.

I'm 31 and in a Company Personal Pension Plan. I have selected a portfolio of funds based around a UK tracker fund plus a few 'higher risk' european funds (for a bit of interest and hopefully growth!)

I am completely flummoxed though by the issue of contracting out of SERPS. I have done so for the last couple of years since I was advised that the decision should depend on to what extend I think the govt will be paying out pensions when I retire (not for 25 years yet at least!) - probably not a lot.

Yet the advice on this board seems to be stay in. Can anyone advise further, or point me in the direction of more info?

What's this thing about a lump sum?

Any help gretefully appreciated.

Thanks

Steve
We are QPR, say we are QPR!
«1

Replies

  • dunstonhdunstonh Forumite
    106.8K Posts
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭✭
    In a nutshell....(if only)

    Contracting out on current DSS rebate levels means it is likely you will get a little less income than contracting in.   Future returns are unknown and you could get back more or less but if you use the mid rate projections, then its a little less in most cases.

    HOWEVER, as recently announced and subject to approval (which is likely) you will from 2006 be able to take 25% tax free cash from contracted out funds.  This includes historical and future funds.  The contracted out funds would also be available from age 55 but not your contracted in fund which would still be 60.   There is also no age compulsion (ie dont need to take by 75) and you could pass the protected rights part down to your children (if not commenced).  Again cannot be done if contracted in.

    There is a lot of potential (which means it could be good, it could be bad).   You could contract out and build up a protected rights fund which could then be used in a SIPP to purchase a property.  You couldnt do that if you contract in (you can do it with normal pension contributions though - just not the contracted in bit)

    I have spoken with a few clients over the last few days regarding contracting out and even though they understand that there is the likelihood, at least at the moment, that the income would be lower, they prefer the tax free lump sum potential and one of them is looking at the SIPP option for later on.

    I'm actually starting to look forward to pension simplification now.   (read simplification as more options available.   More options usually means more difficulty understanding.   How is that simple  ;D )
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • isasmurfisasmurf Forumite
    1.8K Posts
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    ✭✭✭
    I'm not an expert on this but wouldn't the best way to put it in a 'nutshell' be

    Contract-in - you rely on the Government paying out a set amount.
    Contract-out - you invest the S2P part of your National Insurance contributions in your fund, and rely on returns of the stock market, hoping that it will beat the Government returns.

    It all depends on your attitude to risk as to whether to contract in or out. Returns are quite low at the moment and expected to be so for the forseeable future is the reason why advice seems to be contract in, particularly for those near retirement.

    Although I may be wrong as I still struggle to get my head around this. Rebates to contracted out people are quite a bit higher than under SERPS, yet the advice is most people may be better off contacting in. Arrrrghhh!
  • MilarkyMilarky Forumite
    6.3K Posts
    Part of the Furniture 1,000 Posts Photogenic
    ✭✭✭✭
    Although I may be wrong as I still struggle to get my head around this. Rebates to contracted out people are quite a bit higher than under SERPS, yet the advice is most people may be better off contacting in.  Arrrrghhh!

    The reason the rebates are now larger than before is because the 'accrual rate' [at 40%] on the bottom slice of earnings above the national Insurance Lower Earnings Limit threshold is now twice what it used to be [i.e. 20%] So a rebate required to match this bigger 'guarantee' will be twice as large also - regardless of age. It then gets a bit 'silly' with the 'accrual' dropping to HALF of the old SERPS on the next slice of earnings [so 10% and not 20% anymore!] which leads to the rebate on this segment being half also. Eventually the 40% and 10% meet at an average of 20% and the 'accrual' retruns to 20% also!

    Hope that explains
    :D
    .....under construction....
  • If, say like me, you have been contracted out for the last x years (on advice) and you now decide to contract back in (similar sort of advice only the opposite ???) have you adversely affected your pension if you had not contracted out in the first place? I have read loads on pensions and feel that there is no real guidance at all! It is just a big dogs dinner!

    I think the government is trying to stress everyone out about this to shorten one's life span hence being less of a burden on the purse! ;D
    Charles J
  • superhoopsuperhoop Forumite
    314 Posts
    Part of the Furniture 100 Posts Combo Breaker
    ✭✭
    Sevster - couldn't agree more - really confusing.

    I should point out that I contracted out after general advice - I don't use the services of an IFA currently so there is no-one else to blame!

    Is there any way of quantifying the difference? I know that everyone's fund portfolios will yield different returns. However someone mentioned above that contracting-in performs better than most 'mid-case' projections. Is this detailed anywhere?

    I'll take some moderate risk, as my fund portfolio demonstrates, and I'm (quite) young. Would this influence the decision?

    Where can I find out more about this lump sum?

    Thanks

    Steve
    We are QPR, say we are QPR!
  • dunstonhdunstonh Forumite
    106.8K Posts
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭✭
    I dont think you will find much advice either way when you are looking for a single answer to fit all.  There are too many variables.

    If you are in low risk or low potential funds, then you ought to be contracted in.  This may have already happened.  Many with profits funds providers have bulk transferred everyone back into S2P.

    If you are in higher potential funds, then it is an attitude to investment risk situation.    Current illustrations tend to show 7%pa providing just under the contracted in benefits and the 9% pa figure giving higher benefits by contracting out.

    So, if you think 9% is achievable as an average, then you may decide to contract out. If you think 7% or less is likely then you may decide to contract in.

    If you want to take your benefits at 55 and not 60 then you may decide to contract out.

    If you want a tax free lump sum from your S2P, then you may decide to contract out.

    There cannot be direct guidence on to match everyone as goals and investment risk vary with everyone.  
    I'll take some moderate risk, as my fund portfolio demonstrates, and I'm (quite) young. Would this influence the decision?

    If you are invested in insurance company managed funds (ie balanced managed, cautious managed etc) then you should perhaps anticipate lower returns than investing in a range of specific purpose funds (european, far east, uk equity) which equal out to a moderate risk portfolio.  
    Where can I find out more about this lump sum?

    Any IFA or website which is providing up-to-date information on Pension "A" day (pension simplification). However, as this doesnt come in until 2006 and can be changed between now and final legislation, it tends to be discussed mostly on internal documents and financial press.

    Some contracted out plans already enhance the tax free lump sum under pre royal assent July 1989 rules.  Its a minority of cases though.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • superhoopsuperhoop Forumite
    314 Posts
    Part of the Furniture 100 Posts Combo Breaker
    ✭✭
    DD - that's very kind of you - thanks for your help. I appreciate it

    Steve
    We are QPR, say we are QPR!
  • dunstonhdunstonh Forumite
    106.8K Posts
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭✭
    There is a factsheet on contracting out on the front page of the ABI website.

    https://www.abi.org.uk

    You should receive this from your pension provider over the coming month or two.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • MilarkyMilarky Forumite
    6.3K Posts
    Part of the Furniture 1,000 Posts Photogenic
    ✭✭✭✭
    I've had a thought - and it is this:

    It is the government [under a department called 'NICO'] that makes these contracted out payments on our behalf. They take no responsibility however for doing anything except working out your rebate correctly and sending this to your insurer.

    In addition, they hold your payment for at least one month [an average of six weeks] due to the cycle operated. In that time they could give you advance information - on what you will receive and when it will be received - and they could [to my mind] provide a general information leaflet also based on the current year's facts relating to contracting out - as generally understood.

    It could take the form therefore of a 'notice of second pension rebate' which could also list any previous credit amounts and the dates of these - effectively a 'running statement' on what you have been paid out to date. Against this could be a 'what you would have received' [in £pa current value?] comparison. In fact in this fantasy of mine it could provide the most comprehensive [and useful] guidance to individuals in this area WHY? Because if one is contracted out one really needs to understand what is happening and how it is meant to work. The amount of detailed information that individuals can be expected to absorb will vary but at present NICO [as representatives of the government] provide no information whatever - an anonymous payment simply appears in your pension fund and you are never told about this. Unless general comprehension is greatly improved therefore how can the bulk individuals who have (or may) contract out hope to make informed decisions? I am saying that the government could be doing a lot of the work currently parcelled out to the insurers and their trade bodies. At the very least the government could test the concept to see if it is capable of organising such information because if it cannot then it becomes a bit cynical hoping that insurers will do a better fist of it!

    [What do others think?]
    .....under construction....
  • isasmurfisasmurf Forumite
    1.8K Posts
    Part of the Furniture 1,000 Posts Name Dropper Combo Breaker
    ✭✭✭
    It is the government [under a department called 'NICO'] that makes these contracted out payments on our behalf. They take no responsibility however for doing anything except working out your rebate correctly and sending this to your insurer.

    In addition, they hold your payment for at least one month [an average of six weeks] due to the cycle operated.
    I'm not sure that is correct. I think the timescale between calculating your rebate and actually paying it, is a matter of 3 or 4 days. It is actually usually the pension providers that hang on to it for a month or two.

    NICO is an executive agency of the Inland Revenue and as such collect your National Insurance contributions and repay the S2P part to contracted-out people. As such, they purely have an administrative role in all this; if any department should advise on what you could have received it is the DWP, as the S2P is their remit. However, this is getting into dangerous territory for a Government department as they are not allowed to advise, and this could be seen as 'advice'. Even if they could, whose to say what the S2P would be worth in x years time (if it still exists). You can of course request a Pension Forecast at anytime. But perhaps things are changing. I seem to recall that part of the Pensions Act is the introduction of a Financial Retirement Planner, similar to the ABI/FSA Pension Calculator. Maybe this will give you the option of saying what if I contract out/in.
    I agree with you that there needs to be more education, too many people seem to have been advised to contract out without really realising what it means.

    I'm not sure what you mean by anonymous payment. The pension provider is required to provide you with a statement detailing the 'minimum contributions' (NI Rebate) received. I do agree though that NICO could provide either directly, or via the pension manager details of how it was calculated, for example the earnings and age it was based on, and how the different components add up to give you the total rebate. I'm sure under the Data Protection Act you could request the details they hold about you anyway?
This discussion has been closed.
Latest MSE News and Guides

Top savings accounts

Up to 1.7% fixed or 0.6% easy access

MSE Guides

24 craft beers for £26 delivered

Flavourly newbies only (norm £70ish)

MSE Deals