Government proposals to allow tax-free cash on protected rights will make contracting out 10 per cent more attractive but will not be enough to persuade IFAs to recommend opting out.
Product providers say although the move increases the incentive to contracting out, it does not go far enough to make it a clear-cut decision.
They claim that opening up S2P to the self-employed will lead to rebates remaining neutral as the Government would need to mirror rates as an incentive to contract in.
Firms warn that contracting out has been a way of promoting the savings habit but keeping rebate levels neutral risks alienating savers.
Scottish Equitable pensions development director Stewart Ritchie says: “The proposals make contracting out a better deal by 10 per cent in the future. But contracting out is about giving up a guarantee. How valuable that guarantee is depends on how much you trust the Government in power when you retire. At the moment, neutral rebates make it hard for advisers to recommend coming out.”
Clerical Medical pension strategy manager Nigel Stammers says: “The Government should decide whether its policy for this second tier of pension is to be funded privately or by the state. By setting the contracting-out rebates at a neutral level, the Government is ducking the issue.
“It is better if Governments define their policy and then design the product to fit. The state second pension is a neutral product and smacks of not having a real policy.”
Richard Jacobs Pension & Trustees Services director Richard Jacobs says: “Contracting out is a complete dog's dinner. IFAs are scared to advise people to come out of the Government guaranteed scheme for fear of misselling. They will advise self-employed people to contract in and that could result in them stopping their personal pension contributions.”