Opt out of SERPS/S2P?

jamesd

The forecast will give two sets of values, one is the amount earned to date. You're certain to get that much. The other is the prediction of the future that assumes that you will continue to be paid as you are now and contracted in or out as you are now, until state pension age.

If the additional state pension is the same in both now and projection then it means that you're contracted out at the moment. It's common for work final salary or average salary schemes to have their members contracted out with their rebates paid into the work pension.

DaveK

Am I correct in this understanding;

If you're under the age of state retirement (less 30 years) then you are in effect getting money back if you're contracted out because (assuming I will work until state retirment age) the qualifying period is 30 years whether I work for 30 years or 100 years I will still only get the same state pension.

Thanks.

jamesd

You're not correct. The state pension is split into two pieces:

1. Basic state pension. This is what is covered by the 30 years and the increase with earnings talk from the political parties. It's not in any way affected by whether you contract out or not.
2. Additional state pension. This is an earnings-related portion that under current plans will gradually become flat rate over the next twenty or so years. The amount you get from this depends on how much you pay in contributions and increases for each year you pay, including above 30 years. If you opt out the opting out money comes from this portion, reducing the additional state pension you get.

The potential gain from opting out come among other things from the chance that you might invest the money to produce a higher income and the ability to take the income at age 55 instead of state pension age. That's something that I think is useful for most people as an option, since it can help with early retirement.

DaveK

Ah great thanks, so if my pot grows enough the advantage is the amount of income draw down I could benefit from because my pot should be larger than if I hadn't contracted out? Also is the 25% tax free lump sum taken from the total pot size or the pot less the protected bit? The contracted out money is protected until I'm at state retirement age so I assume this would mean I couldn't buy an annunity with this money at 55 (not that I'd want to).

I'm seeing my IFA next week but I just wanted to get someone elses views before seeing him.

Paul_Herring

DaveK wrote: »

Also is the 25% tax free lump sum taken from the total pot size or the pot less the protected bit?

The total sum, including protected rights.

The contracted out money is protected until I'm at state retirement age so I assume this would mean I couldn't buy an annunity with this money at 55 (not that I'd want to).

You are able to take the protected rights at 55 along with the rest of your fund (or whatever happens to be the age you're able to take private pensions when the time comes.) This is one of the advantages of contracting out - you're able to use the funds, if you want to, earlier.

Kath_53

Hi, sorry to sound so thick but I opted out of SERPs around 10 years ago and I still receive statements from Axa Equity and Law. I am 53 now and am not sure what to do because I think that I forgot to opt back in as I was advised a few years ago! Can anyone advise me what they think I should do or would it be easier to ask a financial advisor.

jamesd

A few questions should help to narrow it down:

1. Are you in a defined benefit, like final salary, workplace pension scheme? If you are than it's probably getting your contracted out payments. The Axa statement should also tell you whether they are still getting payments from HMRC. If you're in a contracted out defined benefit scheme it's moot because you can't contract back in anyway.

2. Do you think that you may want to retire between age 55 and 66? If the answer is yes, the contracted out money can be taken in that time interval but the contracted in money has to wait until you reach state pension age. Being able to take the money earlier could be very useful to you and could be worth staying contracted out.

3. How are you investing the contracted out money? What's your risk tolerance? If you're quite bold and successful with your investments it could be worth staying contracted out even if you won't retire before state pension age, because it could pay more than being contracted in.

Otherwise you should probably contract back in because you're older than the age at which an average person who pays little attention to their investments is likely to be better off contracted out. Under current plans this will be moot soon because the plan is to abolish contracting out in 2012.

After abolishing contracting out the money already paid into contracted out pensions will stay with them. Only the new money is changed, going back to the government instead of the private pension. The plan is also to eliminate the protected rights restrictions for contracted out money, so it is just like any other private pension pot.

wannabemoneysaver

Unsure If I'm posting this in the right place, apologies if not. The thread got me thinking. I'm 40 now and contracted out when I was about 20. After moving jobs , I ended up in a final salary scheme about 9 years ago which I'm still in. As I understand it, that portion of my earnings that used to get paid to the people I contracted out to (Legal and General) now goes into the final salary scheme instead? Certainly on my annual statement from L&G there are never any "fresh" contributions.

I've now got about £6K sitting in there getting single figure increases. I'm guessing also that the govt stopped paying into this as well?

Would I be better off taking this out and putting it into a SIPP to earn some real interest on the markets? Is this legal/ advisable? Would be interested to hear what opinions people have..

Thanks in advance.

dunstonh

As I understand it, that portion of my earnings that used to get paid to the people I contracted out to (Legal and General) now goes into the final salary scheme instead? Certainly on my annual statement from L&G there are never any "fresh" contributions.

That would suggest your occupational scheme is contracted out. In which case the L&G plan, assuming it hasnt cancelled the contracting out instruction is just sitting there like a bucket under a tap that is turned off.

I've now got about £6K sitting in there getting single figure increases. I'm guessing also that the govt stopped paying into this as well?

You have already said the Govt hasnt paid any rebates so no need to guess.

Would I be better off taking this out and putting it into a SIPP to earn some real interest on the markets?

What makes you think that a SIPP will be any better?

Is this legal/ advisable?

SIPPs are for experienced investors to utilise direct investments. I am going to guess you are not an experienced investor based on your comments. So, whilst you can do it, what benefit would you get from it that would make it better than the investment options within the L&G plan?

wannabemoneysaver

Well, I'm fairly experienced based on having Shares ISAs for a good few years and having made a pretty good return despite the downturn.

I don't know a lot about SIPPs other than I can invest where I choose ( On balance a portfolio with medium risk funds should return more than L&G I would think over the long term - 15-20yrs). Plus my final salary scheme won't kick in until I'm 65. As I understand it, you can take a SIPP earlier.

I'm trying to learn more and I suppose thats the reason for posting...