Opt out of SERPS/S2P?

dunstonh

Execution only has come under scrutiny from the FSA in respect of two areas. Possibly conflicting areas as well

1 - You must not give the slightest bit of advice. Even a nod towards a fund would be classed as advice.
2 - You cannot transact execution only when you believe the contract not to be in the best interests of the individual.

Providing you arent doing anything that is blatently silly you shouldnt have a problem. The sort of areas they would class under that occupational pension transfers from final salary scheme to personal pension.

EdInvestor

Currently there are execution-only problems with taking an income from a PR fund if you want to do drawdown rather than buy an annuity.

The DWP doesn't want to let you put the money in a SIPP and the insurance companies don't seem to want to let you take an income from a small fund.

So if you're not really rich, you could have problems.

It may be better to contract back in.

jamesd

dunstonh, thanks. It seemed to me that the FSA is heading in the direction of effectively requiring that certain sales can only be on an advised basis, because of the screening required to decide that you are safely able to make the sale. Glad it's not there yet.

EdInvestor, I'm contracting out for the first time, having carefully established that I'm likely to be better off after doing so, so contracting in isn't likely. I'll hope that the drawdown inconsistency that you and dunstonh have been discussing elsewhere is sorted out by the time it matters to me, since things do appear to be heading in that direction.

You're right that drawdown is what would interest me for at least most of my fund, but this will be a modest portion of the total fund, so I can live with an annuity if I must. Even after contracting out, total pension contributions are around or below half of my long term investing, so there's likely to be a lot of flexibility from the ISA side and other possible areas.

dunstonh

dunstonh, thanks. It seemed to me that the FSA is heading in the direction of effectively requiring that certain sales can only be on an advised basis, because of the screening required to decide that you are safely able to make the sale. Glad it's not there yet.

There is an increasing trend on two fronts there:
1 - DIY people transacting high risk transactions not knowing what they are doing and making a balls up
2 - advisers putting through transactions as execution only that have had a bit of advice or help given.

The FSA wants to limit both of those from happening. At present, its really only occupational pension transfers that wouldnt stand up as execution only or a blatently obvious transaction that is clearly wrong. Contracting out is very much personal choice and the decision to contract out. There is no reason why that could not be transacted on execution only basis.

jamesd

dunstonh wrote:

2 - advisers putting through transactions as execution only that have had a bit of advice or help given.

• Person signed client agreement for me saying advised sale and asking questions intended to determine the basic Scottish Widows pension risk profile.
• Told employee in same company to stick with the default fund for at least a year (consensus I think, he's under 30 and of reasonably high risk tolerance).
• Avoided my direct question in email about what his firm, describing itself as independent, charged in fees (menu wasn't provided) but mentioned in semi-related prose that the sale is unadvised, something he had to have known at the time he signed the client agreement.

I'd be tempted to say he was clueless about COB if he hadn't already avoided answering too many leading questions that would cost him money if he answered them.

clairehi

Has anyone tried to do a back-of-envelope type comparison for themselves of the estimated benefits of contracting in/out for this year?

Would be interested to know how you went about doing it.

For contracting out: I used an on-line calculator to work out the rebate due for this year, and put it into the FSA pensions calculator to work out a possible income per week at retirement age.

For contracting in: this is a bit harder to work out and I wonder if anyone else has done it?

mh1923

Okay, I thought I understood the issue, but after reading this thread and the stuff on the pension service website, I'm more confused than ever.

My situation: I'm an American citizen who moved to the UK two years ago, at age 33. I work full time, and have a company pension that is not contracted out. I contribute 2% (which will go up to 3% when I turn 35 next month) and the company contributes 4% (rising to 6%). I have another 1% as a voluntary contribution. (Yes, I know this is not enough! We're working on that.)

My understanding was that, having started my working life in the UK a bit late, I will not qualify for the second pension. I thought I had seen a chart that spelled it out, but now that I'm looking again, I don't see anything like that. If I'm not going to qualify, regardless, then I definitely want to contract out before April. According to my company pension scheme, I'm not allowed to have an additional pension, other than a rebate-only contracted out scheme.

So my questions:
1. Was my original understanding of the second pension correct, in that I have nothing to lose by contracting out?
2. If so, how do I do it? I've gone to the sites of various providers, but I haven't seen any type of 'rebate only' pension product offered. Is it called something else?

I have a thousand more questions, but I'll stick with those two for now, as those answers will probably narrow down the rest.

EdInvestor

mh1923 wrote:

My understanding was that, having started my working life in the UK a bit late, I will not qualify for the second pension.

That wouldn't have been correct before (you need a minimum of 10 years to qualify for some state pension) and it certainly isn't now, as the minimum years required to get the full amount of basic state pension is to be reduced to 30, so you are well in to get the full amount if you remain here until retirment. There is another pension on top of the basic called the second state pension (S2P formerly known as "Serps") This is what contracting in and out refers to. You will get that too, as you are contracted in ( ie your pension scheme is not contracted out.)

1. Was my original understanding of the second pension correct, in that I have nothing to lose by contracting out?

As your company scheme is contracted in, you would need to contract out on a personal basis by opening a separate private pension. You would then receive National Insurance rebates annually into this pension which you could invest yourself.

The question is, if you did this would the investment returns/annuity rates etc be likely to match or better the S2P income you would get when you retire if you left things alone? Most people think they wouldn't, because the rebates are too small and it is better to remain in S2P.

On the other hand with the contracted out pension, at age 55 you can take 25% of the money in tax free cash, plus an income, whereas with S2P you will have to wait till 68, get no cash and can't hand the pension on to a spouse.It is on the cards that contracting out will be stopped for personal pensions in 2012.

. If so, how do I do it? I've gone to the sites of various providers, but I haven't seen any type of 'rebate only' pension product offered. Is it called something else?

Any ordinary personal or stakeholder pension can receive the rebates.

dunstonh

The question is, if you did this would the investment returns/annuity rates etc be likely to match or better the S2P income you would get when you retire if you left things alone? Most people think they wouldn't, because the rebates are too small and it is better to remain in S2P.

You need to average around 3-5% a year above inflation to beat contracted in funds. Someone with a low risk profile is unlikely to achieve that with low risk investments. A higher risk investor could beat it and may consider it a viable option. In the early years of contracting out, it was much easier as rebates were more favourable. Labour have seen the rebates as a stealth tax though and reduced them.

appropriate personal pension plans are the old rebate only plans but as Ed says, some personal pensions and some stakeholder pensions will accept rebate only.

jamesd

mh1923, there is also a UK-USA social security agreement that may well have an effect on what benefits you can and can't qualify for. The best I can suggest on that is that you ask the official UK Pension Service for the effect on your situation.

You should get an updated statement of the rules from your company pension, since the ones you were given became inaccurate after April 2006. As of then you can have an unlimited number of pensions and are not restricted to only making additional contributions in the form of AVCs into your company pension scheme. You can put the 1% extra you are contributing now into a personal pension in your own name that is entirely independent of the company pension.

For the contracted out part, you should look for any pension that can hold "protected rights" money, one of the names for contracted out contributions. Most UK personal pensions and the low cost (but more limited investment choice) Stakeholder pensions generally offer this facility. SIPPs (another type of pesonal pension, generally with more investment choice than personal pensions) don't, a form called Hybrid SIPP do.