Opt out of SERPS/S2P?

gustav

Pal wrote:

...In the end SERPS/S2P is there to provide a basic minimum level of income for everyone..

This is incorrect. SERPS/S2P is not now, never has been, and never will be, a means of providing a minimum income. SERPS/S2P is a topup. Only those who have contributed have benefited, or will benefit.

One thing nobody mentioned. SERPS/S2P benefits can only be taken at state retirement age, which will be 65 for everybody.
Benefits payable from private investments can be taken earlier - 55 in some cases.

Pal

gustav wrote:

This is incorrect. SERPS/S2P is not now, never has been, and never will be, a means of providing a minimum income. SERPS/S2P is a topup. Only those who have contributed have benefited, or will benefit.

This is true, but that isn't really what I meant. My point is that any state benefits are there to provide people with a "minimum" level of income, be it when unemployed, bringing up children, during sickness or after state retirement age in the form of a pension. SERPS/S2P is a bit odd in that it is broadly income related, but it is still there to provide a basic level of pension provision. Why it was ever made income related was beyond me, but presumably the Government thought that it was better placed to provide pensions to the UK population than the private sector.

Anyway, the accrual of SERPS/S2P, irrespective of its original goals, has slowly been reduced over time. More recently the Government introduced minimum levels to SERPS designed to protect very low earners, long term carers and so on.

As a result the basic state pension and SERPS/S2P, when combined, now represent the minimum level of income people can expect when they retire. Contracting-out encourages people to give up part of their state pension benefits in return for recieving money to invest in the hope that they can make more managing the money themselves. In my view, based on current annuity rates, longevity projections, expected investment returns and management charges, this is foolish, especially for people earning below about £18k a year who get an enhanced S2P top-up from their state pension.

Looking at it from another point of view: If the Government said that you could opt-out of job seekers allowance while you were working, many people would certainly think about it. But what if they said that the amount of jobseekers allowance would reduce significantly if you opted out and you could never get that back again? What happens if you suddenly lose your job at age 49 and can't get a new one? What if you haven't invested the tax that you saved very well? Opting out of SERPS/S2P is nowhere near as dramatic a decision, but if people mess up their investments they could lose out on a lot of money during the course of their retirement.

And most people don't understand investments and investing. They pick funds based on marketing material and past performance figures that mean nothing. They pick asset classes based on last year's performance rather than their expectations for the future. They fail to monitor their investments or their chosen funds, and resolutely fail to sell poor investments and take losses, instead clinging on waiting for a rebound that seldom comes. They then finally give up and sell and invest in the new "in" asset class (e.g. property), just as the asset class they have left has the rebound they waited so long for. And so on. In the end any investing most people do is largely gambling, whether they realise it or not.

For this reason remaining within S2P/SERPS seems like a sensible fallback option to me. It is a built in retirement emergency fund that just about everyone who works can build up, and is designed to help provide a minimum standard of living in retirement. If people want to gamble with their investments then that is fine, but that can be done with their own personal savings. If you are wealthy, as Digging Out obviously is, then you can afford to gamble with your safety net, however most people are not in such a fortunate position.

One thing nobody mentioned. SERPS/S2P benefits can only be taken at state retirement age, which will be 65 for everybody.
Benefits payable from private investments can be taken earlier - 55 in some cases.

Protected Rights arising from contracting out can only be taken from age 60, and there is regular discussion about increasing that age in the future.

dunstonh

Quote:
One thing nobody mentioned. SERPS/S2P benefits can only be taken at state retirement age, which will be 65 for everybody.
Benefits payable from private investments can be taken earlier - 55 in some cases.


Protected Rights arising from contracting out can only be taken from age 60, and there is regular discussion about increasing that age in the future.

It was reduced to age 60 a few years back and it's looking likely it will be reduced to age 55 from A day to match simplification rules. However, like most A day things, lets wait and see.

Pal

I have been part of those discussions and don't believe it will actually happen, except possibly as a short term fop to gain votes. At some point the state pension age will have to increase, and the minimum protected rights retirement age is likely to increase with it unless something else is brought in to protect public finances from people who have contracted out but are still on low pensions because they retired early.

As you say though, we shall see.

Jay-Jay_4

I've just fallen over this thread by accident and it's got me wondering.

I was advised by my employer (IFA), at age 18, to contract out of SERPS. I never really understood the issue so agreed. Now,12 years on I still don't have a private pension plan and I haven't contributed to SERPS either!

Sorry to hijack this thread but something tells me that I need to get my finger out and do something QUICK. Can I contract back in?

gustav

Jay-Jay wrote:

I was advised by my employer (IFA), at age 18, to contract out of SERPS. Now,12 years on I still don't have a private pension plan and I haven't contributed to SERPS either!

Ummmmm!
I didn't think it was possible to ContractOut unless you actually had a PensionPlan in place into which the money could be transferred.
If you have been contracted out for 12 years, then somebody is sitting on your (and it is yours) money.

DiggingOut

Pal wrote:

If you are wealthy, as Digging Out obviously is, then you can afford to gamble with your safety net, however most people are not in such a fortunate position.

Cough, cough, splutter, splutter....

Has nothing to do with wealth. I suspect you make quite a bit more than me, actually. (unless you lied on that calculator that gave your percentile wealth world-wide some months back.... :eek: )

I just don't trust government to provide a safety net, so I'm making other provisions as well. Anything I get from state pensions will be a bonus. The things that are relatively safe from Gordon Brown's sticky fingers are my safety net....

Jay-Jay_4

gustav wrote:

Ummmmm!
I didn't think it was possible to ContractOut unless you actually had a PensionPlan in place into which the money could be transferred.
If you have been contracted out for 12 years, then somebody is sitting on your (and it is yours) money.

:eek: someone's sitting on it?

I worked for an IFA at the time and I remember them telling me that they would make commission if I contracted out but I did as they asked because they said that I would be 'better off'

Can I get back into the scheme?

dunstonh

I worked for an IFA at the time and I remember them telling me that they would make commission if I contracted out but I did as they asked because they said that I would be 'better off'

You would have been off until Gordon Brown changed things. Even now, it is considered cost neutral and there is talk about altering the rebate to make contracting out more favourable again.

Plus, if early retirement is on the cards for you, contracting out may be more beneficial and if the "A" day suggestions do come true, as the ABI seem to think, you will be able to take a tax free lump sum from contracting out but you wont if you contract in.

I know the view here by some is contract in. I feel myself stuck in two minds and there are some that say contract out. If you are already contracted out and under the age of 40 and earning over 12k a year, it may be worth waiting until April 2006 to see if the tax free lump sum rule change does apply and if the rebate does get increased.

Pal

Personally I would default to contracting back in, and wait and see if the rules change to make contracting-out more favourable before making a decision. The "safety net" should be the default option, in my opinion.

There is a certain logic to this as well. The Government wants people to contract out. If everyone contracts in, they have an incentive to make the rules and rebates better in order to persuade people to contract out again.