Contracted Out or Contracted In ?

Pal

Has the level of national insurance rebate fallen then?

isasmurf

I don't know about that, but two things seem to suggest not.

1. According to The Pensions Service, "The State Second Pension gives employees earning up to £26,600 (in 2004/05 terms) a better pension than SERPS, whether or not they are contracted out into a private pension, with most help going to those on the lowest earnings (up to around £11,600 in 2004/05 terms)."

2. Looking at official statistics more has been paid out to fewer members of Personal Pensions schemes in the first nine months of 2003/04 than in the whole of 2002/03.

dunstonh

I was trying to get hold of some figures as using one year in isolation doesnt show much. However, i havent looked that deeply and not found any yet. Most of the providers and research companies leave it in the hands of the IFA to decide yet dont provide much information to the IFA. Here are some quotes copied and pasted:

In recent years the government has reduced the level of National Insurance contributions (known as rebates) paid into most contracted-out pension plans. This, along with other economic changes, is making it more difficult to justify the risk of contracting-out.

One consideration to still contracting out is:

The government has stated that they plan to introduce a package of measures to simplify the operation of contracting-out. The changes that are being considered include relaxing some of the restrictions that prevent contracted-out benefits forming part of the tax-free lump sum, and relaxing some of the rules on the timing of when contracted-out benefits can be paid.

Pal

I can't be bothered to look it up but I not believe that C-out rebates have fallen. They were increased in 1997 for personal pension schemes when age related rebates were introduced, and have stayed the same since then. The problem is that they have not kept pace with the increased cost of buying a pension as a result of lower expected investment returns and rising mortality assumptions.

At a guess the rebates should probably have risen by about 15% to allow for mortality, but the main problem is that equity performance predictions (for what they are worth) are now about 7% p.a. instead of 10%, which I assume why most analysis shows that everyone should contract in.

isasmurf

I've been trying to work this out... and the only conclusion I've come up with is.... Could they make this anymore complicated?

The easy bit it is true that contracted-out rebates fell from when PPs were introduced in 1988 (at 6.25%) to when Age Related Rebates were introduced in 1997 (at 4.8%.

The introduction of ARR seems to have given those 36 and under a worse rebate, and those over 36 a better rebate, although rebates increased for every individual each year until they reached the maximum of 9%.

However, as I said at the beginning since the introduction of S2P calculating rebates have become very complicated. From before when there was one flat rate for all earnings between the Lower Earnings Limit (LEL) and the Upper Earnings Limit (UEL), there are now three different rates for each section of your earnings.

The first part is for earnings between the LEL and a new Lower Earnings Threshold, and you get all your NICs refunded on this portion. So far its looking better.

The second portion is for earnings between this Lower Earnings Threshold and a Upper Earnings Threshold, the rates for this portion are lower than in SERPs, roughly just over half of what they were. That's not so good.

The final portion is for earnings between the Upper Earnings Threshold and the UEL. This part is about the same or slightly better than they used to be.

Whether all that adds up to rebates being lower than they were is anybodys guess. Its taken me long enough to work out how to calculate them, so I'm not going to sit here for another three hours to work out if there better or not. I really need to get out more

Milarky

The changes that are being considered include relaxing some of the restrictions that prevent contracted-out benefits forming part of the tax-free lump sum, and relaxing some of the rules on the timing of when contracted-out benefits can be paid.

Where did this quote come from? I've enquired about this point in relation to an earlier thread - also about contracting out, and whether it is possible to draw a lump sum from a rebate-only pension? The answer is currently "no", but there is amibiguity over whether rebate-only pension funds will fall under the proposed new "trivial pension rules". I contacted the Inland Revenue helpline and asked this specific question, and the best they could do was come back later and say that they couldn't say that it didn't [fall within the proposed new rules] but that any legislation relating to rebate-only schemes was maintained or amended by the DWP [not them!].

Come 'A day' [6th April 2006] all these loose ends will have to tied-up of course, but it shows how new legislation gets proposed only with half an eye on the detail  

Pal,

Going in circles here, but this is covered in an earlier thread:

http://forum.moneysavingexpert.com/cgi-bin/yabb/YaBB.cgi?board=Pensions;action=display;num=1074697321#8

There's a link to the Inland Revenue Guide to Minimum Contributions, and [my take] on the way the 'new' rebate compares with 'old' one [something like: 'times 2', 'times a half', then 'times 1'] and is therefore actually 'equivalent' in relation to the defined benefits of S2P compared to SERPS

dunstonh

Where did this quote come from? I've enquired about this point in relation to an earlier thread - also about contracting out, and whether it is possible to draw a lump sum from a rebate-only pension? The answer is currently "no", but there is amibiguity over whether rebate-only pension funds will fall under the proposed new "trivial pension rules". I contacted the Inland Revenue helpline and asked this specific question, and the best they could do was come back later and say that they couldn't say that it didn't [fall within the proposed new rules] but that any legislation relating to rebate-only schemes was maintained or amended by the DWP [not them!].

Come 'A day' [6th April 2006] all these loose ends will have to tied-up of course, but it shows how new legislation gets proposed only with half an eye on the detail  

Pal,

I pulled that info from Standard Life but that was the only information on it that was available.

At present there is a small minority of people who can enhance their tax free lump sum with their protected rights depending on when they contracted out (pre royal assent - from memory its 1988).

I dont think triviality applies to protected rights at this time but cannot be sure and cannot find anything to give an answer.

Im not sure A day will tie all the loose ends up. Im sure there will be new problems or issues that arise.

iceking

So in a word. Should most people be contracted in or out?

Pal

All people should be contracted in, however if you are offered a final salary pension scheme that is contracted out don't let the contracting out status stop you joining it.

Paulina_Fortune

This may sound like a bit of a daft question - but how do you go about contracting back in?

My boyfriend contacted out in the 80's and no longer works for the same company. He gets statements from the NU every so often, but no guidance about what to do with it.

He also has a private pension with Clerical Medical and it all seems to be very confusing. We have a horrible nagging doubt that in spite of paying for a Private Pension and contracting out, he will be left a pauper when it comes to retiring. He's currently 35 years old. We don't even know if he should really have a stakeholder pension, because he earns less than £20k. The IFA we have just says to have faith and doesn't think he would be better off with a stakeholder - well he would say that bearing in mind his commission........

Help! Is there anyone out there, who understands this sort of thing, who speaks plain english or can point us in the right direction?

Thanks.