Contracting out - should I?

raino144

In the light of all the pensions changes in the last few years (and probable future changes) I am wondering whether or not I should be considering contracting out from the State second pension.

I am 25 and currently have a money purchase plan with my employer (6% matched contributions) and I also pay a further 3% into a SIPP.

The reason I am considering it is that I am concerned that there is a trend towards means testing and therefore in future may be at a disadvantage should legislation change.

This is somewhat outside my field of expertise so any direction or advice would be most appreciated.

Mark

dunstonh

I am 25

Well, you are young enough to contract out.

The reason I am considering it is that I am concerned that there is a trend towards means testing and therefore in future may be at a disadvantage should legislation change.

With 15% pension contributions you are making, you are going to be well past any means test value so I wouldnt worry about it. Ironically, contracting out has the potential to reduce your income as you can take 25% lump sum from it.

If your income is enough, your attitude to risk sufficient and you feel the money is better in your hands and not the Govt, plus you prefer to have your pension before the age of 68 (as it will be for you) then contracting out may well be the best option.

raino144

Thanks dunstonh for your reply.

The key thing for me is knowing I have control of my pension and not being 'penalised' for making my own retirement savings provision by having future S2P provision cut.

I am of the opinion that with current demographic trends by my retirement date (in 43 years !) there is a significant chance all state retirement benefits may have to be means tested (meaning I lose out).

It sounds like I am on the right lines with my thinking and will explore this route. Are there any online resources worth looking at - or is this something that needs professional advice?

dunstonh

The key thing for me is knowing I have control of my pension and not being 'penalised' for making my own retirement savings provision by having future S2P provision cut.

S2P could be abolished by the Govt without requiring primary legislation. Many MPs want a single state pension. If you are concerned about how the Govt will treat S2P then you should look more towards contracting out as that money is moved into your ownership and it would require primary legislation to claw it back. Plus if that was to occur it would create a massive stockmarket crash and possibly bankrupt a few insurance companies. So that isn't going to happen. The Govt has already reduced contracted in benefits 3 times and the increase in state retirement age will be a 4th. That has not occurred with contracted out funds.

Contracting in/out is a balance of two risks legislative risk (contracting in) versus investment risk (contracting out). It's a case of which you prefer.

Are there any online resources worth looking at - or is this something that needs professional advice?

Coverage is weak on the internet as no-one has a clue which option will be best. Only time will tell. This forum probably gives you about the best coverage on contracting out that you can get on the internet without seeing an adviser.