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ABI calls for big rebate increase

The contracting-out rebate should be substantially increased and the state second pension should become a flat-rate system if contracting out is to be a success, says the Association of British Insurers.

It says the Government Actuary’s Department will soon review rebate levels and believes a big increase is required to restore its original position and role. The paper comes after research from the FSA and Which? pointing out the losses suffered by investors through contracting out. Which? claims that the average contracted-out person will be 800 a year worse off than if they had stayed contracted in while the FSA says the average pension loss is 4 a week.

Which? has called on the Government to take action on contracting out as a result of both pieces of research. The FSA says because of the large number of consumers who have lost out, it will be investigating whether there has been any misselling.

But the regulator is stressing that underperformance does not equate to missell- ing and says there will not be any retrospective action against advisers.

In the longer term, the ABI says a radical change to S2P is needed, with it becoming a flat-rate system with entitlements calculated as if everyone were earning 15,000 year.

It says contracting out should then be abolished for anyone earning less than 15,000 because they would be bet- ter off staying in S2P while an incentive to contract out should be given for people earning more than 15,000.

The ABI considers these proposals would provide a dec- ent income in retirement for everyone and reduce the need for means’ testing.

Director of life and pensions Chris Kenny says: “The present situation has come about because the Government reduced the level of contracting-out rebate that is paid into private pension schemes.”

A statement from the FSA says: “Performance risk is an inherent risk of personal pensions but remaining in S2P is also subject to potential uncertainty about future Government policy.”


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