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Argument for contracting out of S2P gathers pace

The argument for contracting out of S2P is gathering pace.

It is curious that while the pension industry tells the public it would be better on balance to stay contracted in to the state second pension, virtually everyone I speak to within the industry is contracted out.

Nobody will get in trouble for telling people to stick with the Government scheme but the recently unveiled plan to introduce a flat-rate pension payable to all must increase the arguments in favour of contracting out for the last two years it is possible to do so.

The decision as to whether or not to switch out now seems set around two key points, whether those who stay in will lose out in the big shake-up that will be necessary if Steve Webb is to amalgamate various bits of retirement benefit into a single scheme and the old question of whether you should take a below-par rebate because you do not trust the Government.

Will you get all the second-tier pension benefits on top of your £140 a week in future? The Pensions Policy Institute’s work for the National Association of Pension Funds, research that has been leading the debate on the concept of a universal pension, suggests you would not.

It could be that the Government decides to give some acknowledgement to what has been accrued already in secondtier pensions but, in amalgamating all the various benefits pensioners receive together, it could create winners and losers.

People with a combined state pension of less than £140 could hardly argue if they end up getting more, even if their neighbour who paid less in ends up getting the same as them.

There is a precedent for this in the reduction of the number of years needed to qualify for basic state pension. Some people who had more than 30 years’ basic state pension contributions and who bought extra years to take them towards the 40-year maximum, having been told that doing so was one of the best deals around, ended up no better off for having handed over their hard-earned cash. There may not have been many of them but no rebate was given to these people when this change was made.

Even if the Government does confirm that every single date of second-tier pension will be paid on top of the £140 flat rate, the arguments for contracting out have been strengthened by recent events.

You do not have to be a member of the Tea Party to see that those who say they contracted out because they mistrust the Government have been proved right.

I can think of three ways in which those with accrued Serps and S2P rights have already lost out in recent months.

Anyone with maximum Serps entitlement who is affected by the increase in state pension age by just one year has lost £8,259 as a result and those waiting to the age of 68 to collect what they thought they would be getting at age 65 are losing even more, without even considering further increases in the state pension age in future.

Add to that the fact that even the Government admits the change from RPI to CPI will cost you 8.4 per cent of your benefits in just six years and those yields needed for contacted-out pots to deliver start coming down.

Slightly less exciting but a further hit to the value of Serps, nevertheless, is the fact that from October 6 this year the maximum a widow can receive in survivor benefits is reduced from 70 to 50 per cent.

Of course, there is also nothing to say that annuity rates are not going to get worse and that investment markets might tank but given the flexibility around contracted-out pension benefits, contracting out will surely increase in these last two years. Waiting until the green paper on the new pension will answer some of the questions but doubts over the long-term reliability of a government promise will remain.

John Greenwood is editor of Corporate Adviser

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. For once, I think John is quite right.

  2. David Trenner - Intelligent Pensions 12th November 2010 at 3:13 pm

    John

    I generally rate your articles very highly, but I think you are wrong this time.

    1. Do you seriously think that the government won’t have seen this coming? And if they hadn’t, a few articles like this will soon put them right: civil servants read newspapers!! (If you don’t believe me just think about residential property in SIPPs and recycling tax free cash!)

    2. Have you considered the effect of charges etc on small rebates which are only going to be paid for a maximum of 2 years?

    As a journalist you can afford to make reckless comments, as regulated advisers we cannot.

    Regards

    David

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