Opt out of SERPS/S2P?

dunstonh

So I don't need to worry about opting in or staying out?

I believe Scottish Widows are bulk contracting everyone back in unless they bought the product through an IFA. (dont rely on that though as I may be thinking of someone else).

Even though you have low earnings, you should contract back in. It's just a case of filling out a CA1543 form which you can grab off the internet and sending that to Scot Widows with a request to contract in.

You should also investigate combining the two plans into one. Many providers offer fund based discounts where they reduce their annual management charge the higher the value is. You may find it cheaper then to have one pension instead of two.

kindanice

Thanks for that - I have received a letter from Scottish Widows advising me to contract back in, with a form to complete.

But I thought because I was self employed, that nothing was being paid into this anyway, and if I contracted back in, neither would anything be paid into S2P as I only pay about £10 NI per month, and don't pay tax either (under the tax bracket).

I will certainly look into combining the two pensions - never thought of the management cost before - thank you.

dunstonh

But I thought because I was self employed, that nothing was being paid into this anyway, and if I contracted back in, neither would anything be paid into S2P as I only pay about £10 NI per month, and don't pay tax either (under the tax bracket).

You are not getting anything going out but your NI number will still be flagged as contracting out and would kick in if you became employed in the future. It may or may not be something that happens in future but by filling in that form, you save potential hassle later on.

EdInvestor

Well done to Pal and the techies.

We do notice these little things

chinneybigchops

Hi
I was wondering if anyone could help me as I just haven't a clue. Get my letter each year asking if I want to contract back in. I have decided to do so. I don't know what to do though. I actually haven't been working for the company where I opted out for nearly 4 yrs. My pension is frozen with them and I have not got any other pension now. I have been doing agency work and never got round to sorting it. Soon I am having another baby and won't be working for awhile. Am I right to stay in?

troubled_buyer

I have been contracted out for as long as I can remember. I am now 36 and have been told I need to consider the position.

I seem to remember in the past there were guidelines to use when deciding that were based on age and earnings.

Is this not the case anymore?

This area seems such a mine field. I have been told by one advisor to remain contracted out and by another to contract back in.

Can anybody offer any help?

Pal

No, it is not the case any more. The days of age-related "traffic lights" are long gone. People posting on this board tend to disagree about what to do on this. My personal view is :

"if you don't understand what contracting out is, why the heck are you doing it?"

In order to successfully contract out you have to be willing to take investment and annuity rate risks, be lucky with you investment choices, constantly monitor your investments and change them as necessary, possibly paying for financial advice to do so. IMO the contracting-out rebates are nowhere near high enough to warrant this hassle and risk.

The way I look at it is that the state pension scheme is (almost) a salary based pension scheme, backed by the UK taxpayer, that guarantees a minimum level of income in retirement. Opting out of that into a money purchase/defined contribution arrangement just seems wrong to me. Another misselling scandal in the making.

There will be people who post saying that they do not believe that the Government will still pay a state pension "by the time they get to retire". They are entitled to their view, but I disagree. Since 1978 when SERPS was established, it has NEVER been reduced retrospectively - the future benefit accrual has been reduced, but the past benefits that people have already built up have not been changed at all.

EdInvestor

I would agree with what Pal says for first timers, but:

If you have been contracted out already for years, then you will still need to manage that money, as you can't retrospectively contract back in.So contracting back in doesn't really save you any hassle, and adding more to your existing contracted out fund unless you're very young and/or it's very small probably doesn't add much - so no change there really.

In addition the rules are about to change on contracted out pensions, whereby you can take benefits at 50 (now 60) and take tax free cash of 25% like ordinary pensions (previously not allowed). It also looks as like you will be able to move the money into a Sipp as of next year, so a good increase in investment flexibility is in prospect.On the other hand the rebates are certainly not keeping pace with the state benefits as they are now...

Against that, there are pretty strong hints that the state pension age will be put up, and S2P benefits are already being reduced for the higher paid in order to benefit the low paid and carers. There is no tax free cash if you contract back in either.

IMHO the balance is clear for the low paid and first timers with no company pension: contract IN.

And it's probably sensible for people over say 50 who already have a contracted out fund to hedge their bets by also contracting back IN.

For the rest, if you're willing to manage the money properly, contracting OUT may be worth considering. Hedging your bets by contracting IN for half your career and OUT for the other half might also be a strategy.

All IMHO and not advice, just a few thoughts. DYOR.

Pal

EdInvestor wrote:

And it's probably sensible for people over say 50 who already have a contracted out fund to hedge their bets by also contracting back IN.

Ed's comments are reasonable except that I disagree with the age 50 above - personally I would put the age for contracting back in at about 35.

Obviously you are not going to know which route is better until you come to retire, which is why I tend to er on the side of contracting-in.

The only people that really benefits from people contracting out is the Government, which is why they offer the facility in the first place.

Personally I think that there are going to be a lot of people retiring over the next 10-15 years complaining (loudly, in the media) that their contracted-out pension is nowhere near as much as they would have got from the state if they had stayed contracted in.

EdInvestor

Pal wrote:

Personally I think that there are going to be a lot of people retiring over the next 10-15 years complaining (loudly, in the media) that their contracted-out pension is nowhere near as much as they would have got from the state if they had stayed contracted in.

You could well be right. Low annuity rates are mainly to blame for this, so the move to allow "protected rights" money ( as contracted out pensions are also known) into Sipps for drawdown is welcome, as this will give people access to lower costs not currently available for these funds, especially smaller ones.