My Pension- What does this mean?

$17mma

"We are writing to you about your contracted out pension. We will be contracting yu back into the State Second Pension forthe earliest tax year possible onwards.

We are doing this because an independant report published by the FSA says mosrt people who contract out, or stay contracted out this year are likely toget a lowet pension than if thy were in the SState Second Pension."


Can someone please explain what this means.

For info I have two pensions and this is the second pension that they are referring to.

dunstonh

You have contracted out of the Second state pension (known as SERPS in the past). Your pension provider has taken the decision to contract you back in again because their investment funds are rubbish.

Obviously, it doesnt say that they are rubbish but that is the reason. Bulk contracting in by providers was recently highlighted as a potential breach of the FSA's TCF rules. Around 70% would possibly be better contracted in. That means 30% wouldn't be and forcing those 30% to have lesser benefits would breach TCF. Indeed, it was recently highlighted when the FSA said that the decision to contract in or out should be an individual one and not dealt with on a bulk basis. They highlighted that there is just as much liability to telling someone to contract in as there is to contract out.

As for what it is: http://www.thepensionservice.gov.uk/atoz/atozdetailed/addstatepen.asp

EdInvestor

Hello Emma

Perhaps you could tell us which company the pension is with and which fund(s) it is invested in.

$17mma

EdInvestor wrote:

Hello Emma

Perhaps you could tell us which company the pension is with and which fund(s) it is invested in.

Hello the pension is with Abbey and is one of those stock/share ones.

dunstonh

No reason for a unit linked one invested in medium/medium-high funds to be contracted in on the grounds of poor performance. Abbey have obviously decided that they do not wish to trust the decision to contract in/out with their salesforce. Perhaps they feel the potential of having 30% of the clients complaining in future years of mis-selling is better than having 70% doing it if they leave everyone contracted out.

$17mma

I know I should know this so please excuse my ignorance.

But what is opting in and opting out?

dunstonh

You have the option to leave the provision of S2P with the Govt or to opt out and the Govt pay an annual rebate to your pension provider. The theory is that they can invest it and provide a higher return in the future.

However, the Govt has been progressively reducing the rebate and investment returns have fallen in recent times (although short term flucutations due to stockmarket crash is never a good guide). You now need around 7% p.a. or higher growth to equal or improve upon contracting in. As you get closer to retirement, it gets a little higher, making it harder.

A second "however" is, that there are some other benefits to contracting out that you dont get if you contract in. Some may find the benefits of contracting out are best for them and others may feel contracting in is better.

$17mma

Thank you dunstonh, I understand the opting in or out a lot more now.

But I still havent got a clue on what I should do that would benefit my pension.

EdInvestor

If you contract back in, you might get a higher state pension. But then again it might be paid later,as they are talking of putting the state pension age up. And the current value of what you would get for the second half of the state pension is no guide to the future, as rumour has it this is to be reduced except for the low paid - for them it will be raised.

If you stay contracted out, the eventual fund that you accumulate might not be enough to buy you the same pension as you would get if you contracted back in (whatever that pension turns out to be). On the other hand, you can get your hands on the money at the age of 55, rather than minimum 65 for the state pension, and you can take 25% of the fund in tax free cash.

So it's quite a difficult decision.

Personally, unless I was a very low earner, I would take my chances on contracting out, as the flexibility in having access to a pension and some tax free cash should I need it at 55 is worth something to me.

But I would also pay attention to the money and make sure it was in a good fund at low charges, in the hope I could get it to produce the same pension or close to it as if I had contracted back in.

That way I would win both ways.

Your pension provider has taken the decision to contract you back in again because their investment funds are rubbish.

Maybe, but also maybe there are very high charges on your plan which would stop a good fund from performing well.

I would consider moving this pension if you plan to stay contracted out.Suggest you ring them up and ask for a "transfer value" and also a statement of what charges you are paying, for a start so we can check the "rubbish" level.

$17mma

Thank you ever so much EdInvestor..

I will contact them and ask them.

margaretclare

Abbey equity pension fund not doing very well??

My Friends Provident stakeholder is doing very nicely thank you now that the FTSE is moving up again. I check it daily online and it's a 'feel-good'.

Aunty Margaret