Contract in or out?

BigDonut

Hi All, looking for some advice regarding my pension

The pension plan is a stakeholder one with Halifax investment Services
I started it in June of this year.
I initially decided to contract out of the secondary state pension.

However I got a letter from halifax recently "strongly recommending" me to "reconsider the suitability of remaining contracted out"

So I was wondering what people would recommend I do

I'm under 30 and currently aiming at a retiral age of 60-65

dunstonh

A number of companies have decided to take this course of action if the performance of their investment funds is unlikely to be sufficient to make contracting out justifiable. Or if the company is scared that the contracting out advice may lead them to potential problem later on.

Whether its right for you or not, we cannot tell.

Buying a pension from a bank probably means that it isn't right for you as generally people who buy products from a bank get poor value and are not financially switched on to investing. Thats a big generalisation but contracting out needs to be invested in funds with potential for high growth and very low charges. Banks rarely offer that.

Depending on the size of your rebates, your attitude to investment risk, the funds you are invested in, how and when you want the money, your personal/family situation and your personal view of how you trust the Govt to pay you the S2P will all impact on whether its best to contract in or out.

BigDonut

Thanks for the reply.

I did it through my company and they arrange to use halifax services.
I think I have a medium attitude to risk
currently my pension fund is split 20% on ftse 20% on special situations 20% on foreign markets and I can't rememebr the rest just now
My view being that over the long term then I should see a reasonable return on my investment
The charges for the pension were 0.8% (I think) def. less than 1%

My thinking was contracting out at the moment and investing in long term return funds would give me potentially better return than the government.
Then I can contract back in in say 15 years time and still get some S2P.

could you give me an example of high growth investments with low charges please
Regardning stakeholder pensions that I looked at the halifax one was high up on the fsa table of charges versus returns

dunstonh

ahh, I assumed Halifax, as in bank retail product. The group scheme would be a better product.

My thinking was contracting out at the moment and investing in long term return funds would give me potentially better return than the government.

That used to be the case but the Govt has reduced the rebates. This means the funds have to grow by a heck of a lot more than in the past just to stand still.

Regardning stakeholder pensions that I looked at the halifax one was high up on the fsa table of charges versus returns

FSA tables assume defaults. The FSA also produce tables of average charges that show that the average is some way below the default. The tables are useful but not to be relied upon for every distribution channel.

could you give me an example of high growth investments with low charges please

Following this on from above, for example, when i contract someone out, I do the contracted out part on nil commission basis, making the annual management charge around 0.5-0.6. Coupled with high risk funds (emerging markets, asia etc) there is the potential to break even. There is also the potential to be a long way off. However, most of my Contracted out clients have reviews and we periodically alter fund range to "bank the winnings" into lower risk funds or re-invest into higher risk after periods of drops.

Without taking the high risk there is very little chance of breaking even, let alone going into profit when you contract out based on the current rebate. If you dont want that risk, then you shouldn't really be contracting out.

HOWEVER, there are a few things that may want to change your mind. For example, you can get a 25% tax free lump sum on the final contracted out value. You cannot with contracted in benefits. Or, you can take contracted out benefits from age 55 or leave them to age 75. Contracted in benefits have to be taken at state retirement age (whatever that ends up being). You may or may not trust the Govt with respect to contracted in benefits. i.e. if they abolish S2P, will you retain benefits from contracting in. You should do but some people are less sure.

BigDonut

dunstonh wrote:

That used to be the case but the Govt has reduced the rebates. This means the funds have to grow by a heck of a lot more than in the past just to stand still.

I wasn't aware that rebates had been reduced, thanks for letting me know.

Without taking the high risk there is very little chance of breaking even, let alone going into profit when you contract out based on the current rebate. If you dont want that risk, then you shouldn't really be contracting out.

I understood that a bit of risk was involved but didn't realise that such high risk investements would be needed to break even.

As you say the 25% in cash is a good thing but not worth it if the return from contracting out is way lesss than staying contracted in.

I guess I need to decide either to contract back in or adjust my fund range so that whatever % is contributed by contracting out is invested in HIGH risk funds. Then have to review it regularly to ensure that it is performing, and as you say bank the winnings (i.e. reduce the % that is in high risk)

thanks again for your answere, very informative

BigDonut

One thing I'm considering is keeping my pension thing with halifax
but starting another pension with another company

Is this allowed?

Milarky

Have rebates been 'reduced'?

Because the state second pension [S2P] guarantees higher benefits that its predecessor scheme [SERPS] did, the rebates now being paid are generally higher than before, and skewed towards the bottom of income scale.

I believe there is an argument about whether these levels of rebate - compared to the level of benefit in S2P - are 'adequate', but I haven't seen any evidence that rebates are actually worth less than they used to be - or would have been.

There was disappointment expressed by [I think] the Association of British Insurers when the government's five-year review of age-related rebate rates came out recently, and only added about 0.1% to previously set levels. This was seen as unrealistic in light of the amount by which expected future investment returns will have come down ["lower inflation" etc] compared with when the previous review was undertaken.

I think that the government actuary assumes something like 'real' returns of 4.5% - that is about 7% 'absolute' returns [inflation at 2.5%]. Now maybe that is unrealistic - 7% pa - yet the 'Footsie' has gone up about 14%* since the start of the year alone.

Can anyone enlighten? Is 7% the required/assumed rate of of growth around which all these arguments revolve? [Also, future increases in longevity will raise the required rate of return, too, other things being equal]. Is the GAD simply acting impartially here, but with 'duff' assumptions, or is there geniune uncertainty about the adequacy of rebate levels?

Thanks

*It's now up more like 10%, following a move down in the last couple of sessions - but still a good year so far.

Milarky

BigDonut wrote:

One thing I'm considering is keeping my pension thing with halifax
but starting another pension with another company

Is this allowed?

Almost certainly yes. But do note that existing stakeholder plans benefit from slightly lower charges than will new ones in general - because of the raising of the stakeholder 'cap' [from 1% to 1.5%] for new policies taken out since April 2005.

EdInvestor

Not only have the rebates been cut, but an eagle eyed analyst recently spotted that future returns from S2P are forecast to be so low that people are now suspicious the Government plans to phase it out and use the money to finance a bigger basic state pension, with some kind of provate pension running alongside. Compulsory contracting out anyone?

Perhaps the upcoming Pensions Commission report will give us a clue?

dunstonh

Almost certainly yes. But do note that existing stakeholder plans benefit from slightly lower charges than will new ones in general - because of the raising of the stakeholder 'cap' [from 1% to 1.5%] for new policies taken out since April 2005.

A number of stakeholder/personal pensions have fund based discounts which means that having your funds combined can be the cheaper option.

Although the 1.5% 10 year rule exists, its very easy to pick up a 1% version. Providers have made the extra 0.5% an option (when bought through independent advice channels). No doubt some tied agents or direct sources would have added it.

There have been lots of "hints" that S2P is on its way out. I think it will happen.

BigDonut

Milarky wrote:

Almost certainly yes. But do note that existing stakeholder plans benefit from slightly lower charges than will new ones in general - because of the raising of the stakeholder 'cap' [from 1% to 1.5%] for new policies taken out since April 2005.

hmmm ok.
Since I took mine out in June 2005 then I guess that has little effect on me but I should consider the % I would get charged elsewhere compared to what I get charged with halifax.

Regarding the abolition on S2p (if it happens), what will it be replaced with?
I'm thinking they will just get rid of it and encourage / make it compulsary to have a stakeholder pension