Contracted out of SERPS

wonderland21

I was "sold" the idea of contracting out of SERPS in the early 1990's when I was in my early twenties by someone who was working for General Portfolio (I think). I somewhat naively agreed (he was a friend working on commission). I have no paperwork about it and nothing has been sent to me since I ticked the box on a form.

How can I find out if I am contracted out?
What are the implications of having contracted out?
Should I do something about it?

I am self-employed now.

Thanks for advice in advance!

Paul_Herring

wonderland21 wrote: »

I am self-employed now.

Contracting out was irrelevant to those who were self employed. Almost everyone contracted out ceased to be contracted out on April 6 2012.

How can I find out if I am contracted out?

You would have had NI rebates paid into your personal pension scheme.

What are the implications of having contracted out?

You get less S2P (if it's still around by the time you retire.)

Should I do something about it?

Since it's finished, there's nothing to do.

dunstonh

I was "sold" the idea of contracting out of SERPS in the early 1990's when I was in my early twenties by someone who was working for General Portfolio (I think). I somewhat naively agreed (he was a friend working on commission). I have no paperwork about it and nothing has been sent to me since I ticked the box on a form.

The pivotal age for being in or out was around 40-45 (i.e. best to be out if under that age and best to be in if over that age)

I am self-employed now.

As Paul says, you are contracted in as everyone now is (on money purchase schemes). However, self employed individuals do not quality for S2P (or SERPS previous to that). So, even if you were contracted out it wouldnt matter.

The self employed only qualify for the basic state pension. Not any additional state pensions.

jamesd

Congratulations! You've probably benefited. Since you paid no SERPS while contracted out you won't have any earnings-related Additional State Pension for the time when you were contracted out. You also won't while self-employed unless you're getting a PAYE wage. If you become a PAYE employee in the future and get paid enough then you'll get S2P contributions that will could towards getting you some Additional State Pension.

You now have a pension pot with the company that was getting your rebates. You can control how that money is invested, and should. It's also probably in a scheme that's costly compared to current ones, with less investment choice. If you have no idea how to contact them, call the Contracted Out Pensions Helpline and ask them to tell you who was getting the money and their contact details.

Contracting out has no effect on the Basic State Pension. You were still accumulating entitlement to that.

MotheroftheKid

Sorry for hijacking this post, I'm not very clued up with pensions.

I contracted out in 1987 to Scottish Widows, I receive a statement yearly, the current statement states transfer value is £31876.15, resulting in a yearly taxable pension of £1170, obviously certain assumptions apply.

Have I read the above posts correctly - can I transfer this pension to another pension provider? Am I no longer contracted out of SERPS and can expect a regular state pension upon retirement?

jamesd

The money that is currently with Scottish Widows can stay with them or be moved to another pension if you like. You get to choose which investments to use. This money is made up of the rebates from when you were contracted out, paid into the pension by the government, out of the NI you were paying, a small part of it. The pension income number is probably assuming that you use the pension pot to buy an annuity that increases with RPI inflation. That's one of the unpopular types, a level annuity is more popular and would pay out more initially, but inflation would reduce the value longer term. You don't need to buy an annuity at all, you can leave the money invested inside a pension and take income from the investments, this is called income drawdown. Income drawdown has the advantage that the pension pot can be 100% inherited by a spouse for their own pension or inherited by others after a 55% tax charge.

You were accruing years for the basic state pension while contracted out.

You weren't accumulating any earnings-related Additional State Pension for those years. You are now accruing more earnings-related state pension if you're getting PAYE income. How much you get depends on the earnings for each year and how many years you were paying in. You can ask for a State Pension Statement to find out how much you have currently accrued for the state pension.

So you get Basic State Pension, reduced Additional State Pension and the private pension that is currently with Scottish Widows.

Unlike the state pensions you can take the private pension at any age from 55 and can take a 25% tax free lump sum from it. This can be particularly helpful if you retire before state pension age, which is very common.

Assuming that you're under 50 now, better still if under 45, you were contracted out for a great time to be contracted out and are probably better off as a result. If you're older than that the last few years may not be so great but you still have gained the flexibility to take the money earlier. The early years when you were within the likely best age range were still clearly likely to be good.

MotheroftheKid

Thanks for that detailed and prompt reply Jamesd. It will certainly give me something to think about - I am 46, not married, so will have to ensure this paperwork is with my "Open when I Die Folder"!!!! :beer:

Paul_Herring

MotheroftheKid wrote: »

Have I read the above posts correctly - can I transfer this pension to another pension provider?

If you wish to, yes.

Am I no longer contracted out of SERPS

... most who were contracted out are now contracted back in (certainly all those who asked to be contracted out are)...

and can expect a regular state pension upon retirement?

You can still expect the basic state pension. Everyone who's got the requisite number of years of NI payments can expect the basic state pension, regardless of whether they were contracted in/out.

Contracting out means you weren't increasing any top-up to that basic rate - i.e. SERPS/S2P, instead it was/is expected that the rebates to your pension fund, on maturity, would 'more than' cover it.

As DH mentioned above, the cut-off where that (extra) money in your pension fund 'could potentially' produce a pension that would outstrip any extra you'd get from SERPs/S2P was generally around 40/45.

Paul_Herring

Paul_Herring wrote: »

As DH mentioned above, the cut-off where that (extra) money in your pension fund 'could potentially' produce a pension that would outstrip any extra you'd get from SERPs/S2P was generally around 40/45.

Question for DH (or any of the other financial bods) if you're still watching this thread...

Regarding

The pivotal age for being in or out was around 40-45 (i.e. best to be out if under that age and best to be in if over that age)

Is that for someone who was 40-45 when it was first introduced, or at any-time since?

e.g. someone who contracted out when 35, would they have been 'better off' contracting back in at, say, 40 or staying contracted out?