Opt out of SERPS/S2P?

chamb7914

Can someone help

I am a 31 year old man earning 33100 a year, i give £100 a month to my company stakeholder pension which my employer matches giving a monthly pension contribution of about £240-250.

I have just opted out of the SP2 thingy and am wondering if what ive done is correct.

I have also an armed forced 1/2 pension payable at 60 which will (in todays money) give me about 4500 a year

If it all goes belly up does this mean i will get diddly squat from the govt.

Any advice help or .....M.O.T style headscratching and its gonna cost you comments welcome

cheers

dunstonh

I have just opted out of the SP2 thingy and am wondering if what ive done is correct.

Income is enough. Age is fine. Providing you have a decent enough investment spread of medium risk or higher, you "should" be ok.

If it all goes belly up does this mean i will get diddly squat from the govt.

It doesnt have any impact on the state pension. You are just giving up the second state pension.

deadparrot

given the changes made in the pre-budget report yesterday, ie changes to S2P being brought forward from 2012 to 2009, am I right in thinking opting out wont be an option after April 2009 now?

will we all be forced back in to S2P or will contracting out continue but presumably the refund will be capped at this new UAP limit?

jamesd

deadparrot, see changes to S2P which suggests that there's no change in the date of ending of opting out, just in removing the effect of increasing the NI upper earnings limit to the start of the higher rate tax band by introducing the Upper Accrual Point early and setting it to the level before that change in NI limit.

That is, it's taking some of the money that those earning between UEL and higher rate today would have been able to get in increased contributions by opting out. Makes it even more clear that raising NI limit to the start of the higher rate tax band is a pure tax that's not intended to really be for NI at all.

For those not familiar with this, there's currently a point between the Upper Earnings Limit above which employee NI falls to 1% and the start of the higher rate tax band. This is being eliminated by the last budget and the new UEL will be the start of the higher rate tax band.

deadparrot

Thanks, I'm not sure if the link you posted is talking about the same as this one, or maybe your link is more accurate and the Daily Mail is being well the Daily Mail

why would they bring forward the S2P cap, but still allow opt out to continue untl 2012? wont everyone earning more then ~34K be advised to opt out?

Mr Darling's move, which was buried in the detail of his autumn statement, will hurry forward by up to five years a planned cap on the value of the new state second pension ([URL="javascript:self.name='main';PopUp('you_popup','/pages/jargon/index.html?in_jargon_term=S2P','350','150')"]S2P[/URL]), which will limit the value of pay-outs to pensioners.

The cash curb was first planned as one of the ways to meet the costs of the Government's most popular long-term commitments for pension reform, the restoration of the link between the basic pension and earnings. Originally both of the measures were expected to come in at the same time in 2012 at the earliest or possibly as late as 2015.
However, Mr Darling announced that the money-saving cap will be introduced in 2009, well ahead of the restoration of the link. The Chancellor told MPs: 'We will bring forward the start date for flat rating the state second pension to 2009.' Official Treasury forecasts estimate that the measure will be worth £730m over the first two years. If the earnings link is held back until 2014, the loss to pensions will total exceed £2bn.

http://www.thisismoney.co.uk/retirement/article.html?in_article_id=425185&in_page_id=6

jamesd

deadparrot, with the title "PBR 2007: Changes to S2P" it seems likely that it is talking about the same Pre-Budget Report. The link I gave explains the reasoning: the higher UEL would result in larger opted out contributions paid out now by the government from the NI paid by the employees. That means less extra tax revenue from the 2007 budget increase in UEL.

Whether it's a good idea to opt out still depends on things like risk tolerance for investments and age, which affect whether you can grow the investment more than the state pension equivalent; and personal circumstances like being single or wanting to take the money earlier than state retirement age.

For middle aged people earning around the UEL with medium or higher investment risk tolerance I do think that opting out is a good idea, both for potentially higher returns and the greater flexibility. I'm assuming that other total pension provision by the person is going to be ample at this salary level, so the risk is moderated, while there's going to be a higher than usual chance of wanting to retire early.

The accountingweb summary of PBR 2007 and 2008/9 budget changes is also worth a look.

deadparrot

jamesd wrote: »

deadparrot, with the title "PBR 2007: Changes to S2P" it seems likely that it is talking about the same Pre-Budget Report.
.

yes, I know that.

both your link and mine are talking about the same pre-budget report, but both have different interpretaion of the consequences.

if the amount on s2p will be capped from 2009 then for anyone earning enough to exceed this cap should seriously consider opting out, surely staying in is simply guaranteeing a loss?

jamesd

I don't see a difference. Both are saying that this is bringing forward the start date of the flat rating process. You don't lock any rates or limits in by opting out now so the introduction of the cap just removes extra S2P or opted out contributions that would have happened.

It's effectively neutral on the decision whether you should opt in or out. The usual risk and personal factors are what make it worth it or not.

For me it is easy: opting out is almost certain to be in my best interests. But that's me, with a high risk tolerance, desire to retire early and other personal factors.

deadparrot

I guess I assumed they were stopping opt out in 2012 to coincide with this new S2P cap, else all the high earners would opt out?

If you can continue to opt out ofter 2009 then will the refund received be reduced due to the cap? if that's what you are saying then yes it's probably neutral.

jamesd

The refund will stop increasing because of the cap so yes, it's effectively neutral.

The big news in this PBR was CGT. Makes capital growth far more attractive than income for those subject to higher rate tax.