Opt out of SERPS/S2P?

Questions about this subject arise all the time, although it's usually whether they should opt back in. So, you're quite unusual and it's a refreshing change (Wasn't that a cider advert?)

With the State Pension you contribute towards your Basic State Pension, and if your an employee you contribute a bit more towards a little extra known as State Second Pension (S2P). S2P replaced SERPS in about 2001. S2P is supposed to be more generous for people on lowish incomes and women compared with SERPS. Whether it is I have no idea.

By opting out of S2P, you are requesting that the government gives you back the money you contributed towards that part of the pension to be re-invested with your private pension. To opt out you ask your pension provider for the forms, fill them and send them back. The government will pay back a percentage of your National Insurance contributions to your private pension in the year after they are made. E.g. You pay National Insurance in 2004-05, the government will pay back a percentage of this sometime during 2005-06 (usually the summer of 2005). The reason for this delay is that they need your employer to send in details of your pay, tax and national insurance payments at the end of the tax year (known as a P14 end of year return). Only when this form has been processed and entered on to the National Insurance Recording System (NIRS2) will the system calculate your National insurance rebate and pay it to your pension provider.

Should you opt out? Well, that's a contenious issue. You'll get replys from the regulars on this board that will say point blank you shouldn't. Also, a number of the major pension providers are recommending that all their members contract back in to S2P. Personally I don't take that view. I think the reason for the general recommendations to contract back in are to do with the extremely complicated formula to calculate your rebate and pension providers don't want to be hit with misselling claims in the future.

Whether you should contract out depends on a number of factors, including your attitude to risk, and what do you think the government will do with State Pensions in the future.

My own personal view (as someone in their late 20s) is that I would rather have the S2P in my pension pot as I know I have got it and I've got at least the next 30 years to recover any losses that it may make in the short term. Plus I don't believe the S2P will exist when I retire.

I'm sorry I can't give any more helpful advice.

Although generally you should opt back into SERPS as it is extremely likely that contracting in will give you slightly higher benefits (as things currently stand). However, there are things which people find more important which mean they want to remain contracted out.

S2P is currently under review and contracting out benefits may be able to have a 25% tax free lump sum taken from them. This is not the case with contracting in. This point has yet to be made official although the ABI seem to think it is more likely than not.

The amount of the rebate is under review currently and suggestions have been made that it will be increased. This will favour contracting out more than contracting in.

Then there is the personal view that some have that they prefer to have the money in their own pot rather than the Govts in case the Govt takes it away later on. This is highly unlikely but not impossible.

Providers only offering low potential funds bulk contracted people back in because they knew their fund(s) would never be able to meet the required growth rate which makes contracting out better.

I did.

(It was worth coming back, just to disagree with Pal again).

I don't trust the government to not mess with S2P before my retirement. It costs them too much money, they are going to hit it. As far as I'm concerned, better to know what I have, then to trust them and have it taken away.

Of course, I'm also bullish on the markets (as far as the long-term is concerned).

deemy2004 wrote:

The pension funds are pulling £50 billion a year out of the stock markets... Still fingers crossed

If Bush gets his way on US pension reform, far more than that is going into the US equity markets in the not too distant future. Basically, what is being proposed is something comparable to contracting out of S2P here, but probably on much more favourable terms than we have here. Probably at least 50% of those under 40 will jump at it. Imagine 30-40% of all that lovely money going into the bond market and the rest going into equities. See share prices go up.

Then, see a lot of the money that is currently going into US equities going elsewhere around the world, since US equities will then tend to be overpriced. And see a lot of venture capital going into new investments/businesses/inventions.

No guarantees, but the potential is there for a long-run bull market for the next 10-15 years.

Of course, the dollar could collapse, or oil double in price, as well. Plenty of potential for disaster.

I do think the UK pension funds' maneuvering is likely to have a fairly significant impact in the short to medium term, but in the long run, I think there are much larger forces likely to come into play, for good or ill.

What DO is describing is a stock market boom fueled almost entirely by demand for stocks, rather than any underlying fundementals, which is just another stock market bubble. No-one can predict what is going happen. One thing I can guarantee is that you are both going to be wrong, as would I if I attempt to make any predictions. By all means ride the wave but timing your exit is going to be tricky and you have to be prepared for the worst if you get it wrong.

Dragging the thread kicking and screaming back to the original question, which was about opting out of SERPS/S2P.

Encouraging people to opt-out of a Government backed final salary style benefit in order to invest in the hope that equities will go up in the future is not only irresponsible but also exactly what caused the pensions misselling problems in the 1990s!

In the end SERPS/S2P is there to provide a basic minimum level of income for everyone, and there has never been an example of a Government removing or worsening an accrued benefit - they have only ever worsened the rate for future accrual or increases in payment. As a result I believe that everyone should opt into the state schemes as a fall back measure.

If you want to gamble in the stock market you do it with your spare money, not with your emergency fallback fund.