Opt out of SERPS/S2P?

Pal

While I am sure that your are correct, it is hard to see how anyone other than those who are already long term disabled or sick could use that to their advantage. I can't see many people being willing to deliberately disable themselves just in order to get a full S2P pension, although I dare say some might put a claim in anyway!

The rules on incapacity benefit surely make it more beneficial for people to contract in while they are young, so that they get the 10 years full NI paid as soon as possible? In theory they could then contract out once they have paid NI for 10 years, knowing that if they become long term disabled/sick they can keep both the contracting out rebates and get full S2P.

In practice however, most people do not become long term disabled/sick, and so they would have to decide to contracted out at around the ages when it is almost certain that the future contracting-out rebates are not going to be enough to replace the salary related pension benefit they are giving up.

It does raise another point though. Can people who are already claiming long term incapacity benefit still contract-out and receive the rebates into a personal pension? And if they do so and have already paid the 10 years NI, do they still get the full S2P when they reach state pension age? I somehow doubt it but this might be worth enquiring about!

user1234_2

Can a mod please fix the thread title....it is SERPS not SURPS!!

isasmurf

Actually, it's S2P. SERPS hasn't existed for around 3 or 4 years now.

Pal

user1234 wrote:

Can a mod please fix the thread title....it is SERPS not SURPS!!

I have tried but although I can edit posts, for some reason I can't edit the thread title.

I'll have a word with a proper moderator.

CIS

A few points;

State Second Pension is included by default on State Pension forecasts,( I used to work for them as an advisor) under Additional State Pension (apparently the law only defines Additional Pension as a term, not State Second Pension)

Incapacity Benefit does not automatically get you the full S2P, its based on the Labour Market Attachment Rule. If you meet the labour market attachment rule, and providing you received Incapacity Benefit for the entire tax year, you get S2P for that year based on the 1st S2P band (earnings of £12,100).

http://www.thepensionservice.gov.uk/pdf/np46/np46apr05.pdf

Nickynoo1

omg.

Every year i get a letter asking if i want to contract back in. so far i haven't. But reading this i'm totally confused as to what to do. When i contracted out i was 18 and had no idea what the pension guy was on about, he said i'd be better off so i signed. Could this be a mis sell, are their any rules concerning this if i'm not better off. I'm 33 now so have been contracted out for quite some time.

Also what would happen if i had to stop my pension payments due to pregnancy? Would i be better contracting back in when pregnant and not working after birth?

Nickynoo1

dunstonh

Could this be a mis sell, are their any rules concerning this if i'm not better off.

No it cannot. The advisor cannot be responsible for the Govt reducing the rebates (in relation to benefits obtained from contracting in). Also, what makes you think it's a mis-sale?

By contracting out, you now have access to those funds from any age you choose between 55 and 75. Unlike contracted in benefits which are taken at state retirement age (whatever that ends up being). You can also take 25% of the fund as a tax free lump sum. You can't do that with contracted in funds.

There is also a political risk that the S2P. How likely is this guaranteed second state pension to be paid at its current level? People are living longer, the proportion of retired people to the total population is set to rise further, and the cost to the government can only increase. Eventually, the pressure on a government desperate to balance its books may become irresistible. S2P would be a relatively easy benefit to cut, as most voters are only dimly aware of their entitlement to it. The likelihood of your being paid less than the current entitlement increases the further you are from retirement.

Also by contracting out, you ensure the provision of retirement benefits if death were to occur before retirement.

So, there are a quite a few advantages to being contracted out. It's only recently that there have really been any disadvantages.

dunstonh

Contracting out is very much an individual thing. With the pivotal yield required to remain better off by contracting out now around 6.5-7.5%p.a. it does suggest that only those with a medium/high or higher risk profile should contract out. (ignoring other benefits for the moment)

However, I have just read a very good article that suggests if the Govt bows to pressure to scrap the additional state pensions in favour of an increase in the Basic State Pension, S2P entitlements that have already accrued might be lost.

It would be very unlikely that any Protected rights would be clawed back in the event of changes to S2P. None were when SERPS changed and it would take primary legislation to do so.

So, heres another "if, when and maybe".... Those that have contracted out, could retain their contracted out benefits on that basis. Wherease those that contracted in, would lose theirs. Therefore, giving those that contracted out greater benefits.

S2P contracting in/out has really turned into a mess now. You are damned if you do and damned if you dont and only the future knows the real answer.

For advisors it could be a nightmare as we are liable for advice to contract in as much as we are contracting out. A compliance warning has been issued saying that it is just as inappropriate to advise all clients to contract in without regard for their individual circumstances, as it is to advise them to contract out. It even suggested that some providers could fall foul of this with their blanket contracting in decisions.

Possible future complaint scenarios:
1 - you advise someone to contract out and they get less income
2 - you advise someone to contract in and the Govt abolishes S2P benefits accrued but protected rights benefits remain - meaning contracted out was best
3 - you wanted to contract out but a provider forced you to contract in

Obviously, a possible complaint is not necessarily an upheld one. That will rely heavily on the documentation and the common sense (or lack of) from the regulator. But I think you can see the potential future problems. We are in a position where, for the majority, we do not know what the best option is and we live in a culture where if the wrong one is chosen, people will tend to seek compensation.

EdInvestor

It's a tough life, eh dunstonh

Yet another bit of work to be consigned to the "execution only" department.Before you know it, there won't be anything left to advise anyone about with no Catch 22 attached.

PS. Just because you're not paranoid doesn't mean they're not out to get you.

dunstonh

It doesnt worry me personally as I pre-issue my reports and they are heavily detailed and areas like this will have a full pros and cons section. Although, no doubt I will get stung on the FSCS levys for those that havent.

The main point was to raise it as a discussion point again as we have had a few contracting out posts recently. The whole thing on contracting in/out is just not clear cut and there is so little guidence from anyone.