Contracted Out or Contracted In ?

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
26 replies 3.2K views
IvanOpinionIvanOpinion Forumite
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Since the mid-late 80's we have been 'contracted out or SERPS' but last year the company I work for changed this back so that we were all 'contracted in'. They said this would benefit us in the long term.

This now means that in 20 years of employment I only have about 5 years 'contracted in' with the other 15 being 'contracted out'. Also, given rumours of the government severly limiting the state pension in the future does anyone know if this was a good or a bad decision for me as an employee. I am just concerned that I am now contributing to a state pension through my National Insurance that I will never get advantage of.

Thanks
Ivan
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  • dunstonhdunstonh Forumite
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    The funds you invest in would have to grow above a certain amount to make it worthwhile for you to be contracted out. A number of providers know that their funds are unlikley to achieve that rate of return and have "on bulk" contracted everyone back in again.
    This is usually the case with With Profit funds.

    With Equity based investments the word potential is important. If you think the returns are going to potentially exceed the required rate, then contract out. If not, then contract in. There are a few other issues such as charges which can influence the decision to contract out.

    Far less people are contracted out than used to be but there are still times it is worthwhile. However, its not a decision you can really make without getting advice from an IFA.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • PalPal Forumite
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    Try reading this:

    http://search.ft.com/search/article.html?id=040706000940&query=mercer&vsc_appId=totalSearch&state=Form

    I suggest contacting the Contributions Agency and asking them what benefit you are likely to get in either scenario.
  • MilarkyMilarky Forumite
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    From the article, the 'experts' appear to be saying that the amount being paid in the way of National Insurance rebates is about £3.8 bn. But I often hear politicians [et al] referring in the media to: 'the 11 billion' paid in NI rebates. Are the latter referring to a 'global' figure, while the report is referring simply to one type of rebate [e.g. those payments made directly to insurers on behalf of individuals contracted out, not simply the 'reduced' NI payments allowed under contracted-out employment] I wonder?

    For Ivan,

    Since your employer has 'contracted-in' you will notice that you are paying slightly higher rates of National Insurance as a result. You therefore have the option of 'contracting out' as an individual. You would pay the same NI as now but receive a rebate as a lump sum paid to your nominated insurer between August and January in the following tax year. What you may get at retirement is then anyone's guess and the only 'certainty' is the amount of state second pension which you have foregone for that year.

    NB: 'contracting out' is a yearly decision, and you can change your mind as many times as you like up to the point of payment [or it might be slightly earlier than that?]

    Also, 'contracting out' of SERPS is not the same as contracting out of the State Second Pension [S2P], I understand. Since the benefits of S2P are greater [on the initial segment of earning, anyway], existing 'contracted-out employment' arrangements, such as yours, were not redesigned to cater for the enhancements contained in the S2P. As a result, even 'contracted-out' employees receive some additional entitlement from the state - equal to the difference between the levels of SERPS and S2P. Potentially if you contract out as an individual, however, you may receive no additional state entitlement - as your rebate is intended to cover the larger benefits foregone. As a result, S2P rebates may be signifcantly larger than the SERPS rebates were. This does not mean it makes any more sense to contract out, however. It just makes the decision of whether to do so ever more complicated [which will please Gordon Brown, no doubt :(]

     
    .....under construction....
  • PalPal Forumite
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    I believe that the amount being paid in NI rebates is currently about £2.5bn, and needs to rise to £3.8bn to match the benefits being forgone by those currently contracting out. Where did your £11bn figure come from?

    I am not sure I understand the rest of your post (and I am not convinced it is technically accurate) but I can't be bothered to look it up. However the conclusion you have reached is that contracting out makes less sense now than it did in the past, if only because of further changes to SERPS/S2P, which is one I agree with. Contracting out now makes very little sense for anyone.
  • dunstonhdunstonh Forumite
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    For reference, I have only contracted two people out of serps this year and thats out of just over 150 pensions commenced. A complete turn round from 10 years ago when it would be the vast majority who would benefit from it.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • isasmurfisasmurf Forumite
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    From the article, the 'experts' appear to be saying that the amount being paid in the way of National Insurance rebates is about £3.8 bn. But I often hear politicians [et al] referring in the media to: 'the 11 billion' paid in NI rebates. Are the latter referring to a 'global' figure, while the report is referring simply to one type of rebate [e.g. those payments made directly to insurers on behalf of individuals contracted out, not simply the 'reduced' NI payments allowed under contracted-out employment] I wonder?  
    Just to clarify, the estimated cost of NI rebates to all private pensions is £11.6bn for 2003/04. The £3.8bn is just for NI rebates to Personal Pensions.
    Source: Inland Revenue Statistics (Table 1.5) (very bottom of page 1, left column)
  • PalPal Forumite
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    Thanks Smurf.
    For reference, I have only contracted two people out of serps this year and thats out of just over 150 pensions commenced.  A complete turn round from 10 years ago when it would be the vast majority who would benefit from it.

    Presumably what you really mean is that 10 years ago you would have advised the majority of people to contract-out based on the assumptions you were making about future investment performance, rather than "the vast majority .. would have benefited from it."
  • IvanOpinionIvanOpinion Forumite
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    Thanks everyone for your replies. I am not sure I understand it all though but at least it gives me food-for-thought and I can investigate further.

    Thanks again
    Ivan
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  • DiggingOutDiggingOut Forumite
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    Presumably what you really mean is that 10 years ago you would have advised the majority of people to contract-out based on the assumptions you were making about future investment performance, rather than "the vast majority .. would have benefited from it."

    It isn't just assumptions about future investment performance that has changed, it is also the level of rebate.
    I have five stars! This doesn't mean that I know anything about any of the things I post. I could be a raving lunatic, or a brilliant genius, or just some guy on the internet. In fact, I could be all three at the same time.

    If anything I say makes sense, then do it. If not, don't. Don't blame me or my stars if you do something stupid because I suggested it. I'm responsible for my own stupidity only. You are responsible for yours.

    Why, I don't even have five stars anymore! Aren't you glad you aren't responsible for my stupidity?
  • dunstonhdunstonh Forumite
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    Indeed its the level of rebate that has been the biggest issue, not the recent performance.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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