Contract in or out?

edda

Why does it feel like - whatever you do to try and make a sensible decision about your future pension - it's just a massive gamble and the government (of any persuasion) always wins?

Milarky

edda wrote:

Why does it feel like - whatever you do to try and make a sensible decision about your future pension - it's just a massive gamble and the government (of any persuauion) always wins?

To be fair, edda, this is about 'choice'. Unlike the question of whether or not to have a pension, everyone who pays national insurance can either

1) Leave it with the government, and get a 'promised' top up [called 'State Second Pension' or S2P] to the flat-rate state old age pension, OR

2) Use the 'choice' the government gives you to take a notional sum of equal value - once a year - to invest in the hope of doing at least as well at the end of the day.

Yes, it is confusing, and insurers writing to you - their customer - saying: ''we can't see you matching these promised benefits at these levels of rebates and current returns'' does not inspire confidence, but it is important to recognise that S2P is simply one strand in the equation.

Arguably, anyone who cannot at present afford to save for a personal, stakeholder or employer sponsered pension out of their taxed income [on which you get the tax relief of course] should not contract out - although still theoretically possible - as they will be maximally reliant on the state in retirement and should not 'gamble' on any part of what the state will pay them. But if you can afford to save for a retirement [and don't see yourself reliant on the state pension and means-tested benefits, as you'll have savings anyway] then the 'appeal' of contracting out [eg you will get 25% as cash of what is, after all 'government money'] tends to outweigh the 'risks' of doing so.

Finally, yes it is hoary and complicated, I agree. You can 'review' this decision each-and-every year and contract back 'in', then back 'out', then back 'in' again, ad nauseum. As well as 'means', therefore, the 'knowing what you're doing' argument applies very strongly - if you don't understand the 'choice' you are being asked to make [as in anything else] you should err on the side of caution and do nothing.


HTH

EdInvestor

What really annoys me about this contracting in and out arrangement is that the Government supposedly offers you an opportunity to do better than what they offer, but it then

a)cuts the rebates and

b)bans you from putting the money in a low-cost SIPP, which offers the best route to make this pension perform better than the state's offering.(Over the long term the charges you pay in the traditional lifeco pension will remove at least 25% of the fund, and sometimes a lot more, which takes away a big advantage. You need a very high performing investment return to beat the charges and the Govt.).


So I agree with edda.Between the life industry and the Govt, it's very difficult to win.

dunstonh

b)bans you from putting the money in a low-cost SIPP, which offers the best route to make this pension perform better than the state's offering.(Over the long term the charges you pay in the traditional lifeco pension will remove at least 25% of the fund, and sometimes a lot more, which takes away a big advantage. You need a very high performing investment return to beat the charges and the Govt.).

On a like for like basis. A personal pension or stakeholder pension can be cheaper than a SIPP. Also, the product wrapper has no growth potential. it's where you invest that matters.

To say that SIPPs are cheaper is misleading and inaccurate.

EdInvestor

dunstonh wrote:

On a like for like basis

Of course.You can invest in expensive rubbish funds in SIPPs as well as ordinary PPs should you be so stupid.But you can't invest in individual shares in ordinary PPs, and that's where the advantage lies.

It's where you invest that matters.

Quite.

Pal

Or you can invest in rubbish shares that you select yourself within a SIPP. You can lose either way.

a)cuts the rebates..

When was the last time the Government cut the contracting out rebates?

The simple answer on whether to contract out is that if you don't understand contracting out, don't do it! Not contracting out is the least risk option by far.

isasmurf

EdInvestor wrote:

a)cuts the rebates and

I think it should be proportionally cuts the rebates. For most people rebates actually went up under S2P, just not as much as the extra benefits the Government will provide under S2P. IMO The main problem with contracting out since S2P was introduced is the performance of the stock market.

I found this quote on the NAPF website:

The Government has indicated it intends to make the S2P flat rate at some future date yet to be confirmed.

Really? I never knew this. Anyone know anything about this proposal.

Milarky

The current cotracting out arrangements [inlcuding how the rebate is made up at different 'accrual' rates] is described in this old article

I seem to recall reading somewhere that the rebates above the '2LET-3QEF' level of income, up to the 'UEL' [currently at 20% like SERPS was] will be removed five years into the operation of S2P. The significance of the '2LET-3QEF' [who thinks up these terms!!] level is that it is the 'crossover' between S2P and SERPS. But if correct it effectively means that the maximum available under both SERPS and S2P will have been reduced in value from that date.