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Advisers get set for S2P bonanza

The Government&#39s new state second pension, which this month replaced Serps as the top-up to the basic state pension, could prove to be a useful financial planning tool for IFAs.

The new scheme offers IFA clients a potential bonanza even more beneficial than that of the doctors&#39 wives&#39 loophole under Serps which allowed clients to maximise their spouse&#39s pensions. S2P replaced Serps on April 6 as the Government&#39s second-tier pension after it stated that it wanted to reform the earnings-related Serps system to provide a better pension for lower-paid workers.

The 20 per cent accrual rate in Serps has been doubled to 40 per cent under S2P for those earning from £3,900 to £10,800. This drops to 10 per cent for those earning £10,800 up to £24,600 and 20 per cent for above £24,600. S2P is planned to become a flat rate benefit in five years time. It aims to provide a minimum benefit of 20 per cent of average earnings.

People with broken work records such as carers and people with a long-term illness or disability are set to be the main beneficiaries from S2P.

But professionals emp-loying their spouses for minimal wages are also set to have substantially improved benefits. The terms are so generous that Standard Life has called it the Great Government Giveaway.

“Doctors&#39 wives” were entitled to benefits under the Serps&#39 system but because it was earnings-linked, the benefits were very low. Under S2P, benefits are sizeably increased up to the National Insurance threshold.

Anyone earning up to £3,900 can claim an S2P pension on earnings of £10,800. This is below the National Insurance and income tax threshold, meaning a very generous state top-up pension can be claimed without having to pay taxes.

Some IFAs are already switched on to the benefits that S2P will provide for professionals and are keen to include S2P as a major financial planning tool.

Roberts Clark director Ashley Clark says: “This kind of thing gives instant credibility for IFAs because you are almost giving your client something for nothing. This is exactly the kind of thing that impresses clients and can win you more business.

“This will help to cement the credibility of seeking independent financial advice. Most small businesses will not have thought of this. By paying spouses next to nothing, they can maximise the effect of the state system.”

Combined with the £3,600 that could be paid in to a stakeholder plan, S2P appears to be a lucrative pot for the wealthy. IFAs can make sure their clients are made aware of the maximising the benefits available under the state system.

Clark says: “We are punting this idea to our clients. It is the classic situation of paying up to the National Insurance threshold and then getting full entitlement to S2P. We are pushing this heavily, especially getting the double whack of tax relief from stakeholder.”

Richard Jacobs Pension & Trustee Services director Richard Jacobs says: “This is fantastic. But, as with stakeholder, the Government wanted a system which helps the lower-paid but has also helped the financially well-off as well.

“The basic Government aim is to increase additional pension for the lower-paid. That is commendable and should be done but it also cannot be ignored from a financial planning point of view.”

S2P provides much better benefits for lower earners and is also good news for some wealthy savers but the situation becomes less clear cut for higher earners.

Advising higher earners on the advantages of S2P has become a minefield for both providers and IFAs.

The National Insurance rebate levels for contracting out of S2P are so marginal for middle to higher earners that IFAs are asking clients to decide if they want the political risk of placing money in Government hands.

Many IFAs warn that long-term advantages of the state second-tier system are not set in stone and that the Government&#39s generosity may wane.

Jacobs says: “I would tell my clients not to hold their breath waiting for their benefits. It could take 20 years to accumulate and the levels could well have changed by the time they come to retire. Who knows what the Government will have done by then.

“To give advice properly on contracting out is a nightmare. It is a question of whether you want to take on political risk.”

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