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Contract killing

It seems now to be pretty well officially recognised that advice on whether or not to contract out, contract in, contract back in or contract back out is impossible to formulate.

Neither the FSA nor the Government are prepared to provide any guidance, yet now we read about rumblings of another hindsight review just over the horizon.

We know the Government would like everyone to contract out and stay that way but comparisons produced in accordance with the assumptions dictated by the FSA suggest that the rebates on offer are inadequate to make it worthwhile. So the Government Actuary’s Department is to take a fresh look at the levels of rebates with a view perhaps to raising them by the absolute minimum necessary to make contracting out look viable, if only by the most slender of margins.

Yet all the other indicators suggest that remaining contracted in to a scheme which is being constantly whittled away and which may soon be consigned totally to history in favour of an improved flat rate pension simply is hardly a sensible choice.

We already have means testing in prospect, not to mention the fact that in New Zealand, even the basic state pension is already means tested out of reach for all but the financially weakest members of their society. On top of that, there is continuing talk of raising the state pension age to 70. In 10 years, the talk will be of raising it to 75. Who in their right mind would continue paying a full NI stamp to the age of 70 for an earnings-related pension which, on one pretext or another, they may very well be denied?

If you die before reaching your state pension age, the DWP gives your family backnothing. In view of the occasional reports of glitches in the DWP’s computer systems, there must also be some doubt in the minds of many people as to whether or not the DWP can be trusted to calculate Serps/S2P entitlements correctly. All in all, this hardly adds up to a package of expectations to inspire confidence in what the future may hold.

As I see it, the only basis on which advice can be formulated is whether or not the client, in addition to all the factors mentioned above, considers it a reasonable expectation for the funds in which his or her rebates are to be invested will outperform the assumptions used in the standard illustrations. If memory serves, the percentages are either just 1 per cent or 3 per cent above inflation each year so, with inflation presently lower than 3 per cent a year and looking set to stay that way, the funds need to grow only at a rate better than 6 per cent net of charges for contracting out to be a viable proposition. This is on the maths alone. With most life companies’ dismal funds, this probably is not a realistic expectation but with a carefully chosen and monitored portfolio of third-party unit trust funds, it quite probably is.

So, Mr Client,1: Do you trust the Government to provide you at the end of your working life (age unknown but probably higher than it is now) with the earnings-related pension which part of your NI contributions is supposed to be funding (but which, of course, it is not because this week’s NI contributions pay next week’s state pensions).2: Are you prepared to trust my judgement in putting together for you (and monitoring on an ongoing basis) a private investment portfolio instead that will hopefully outperform the assumptions prescribed for the standard comparisons produced by life companies?

Answers on a postcard, please.

Julian StevensWDS IFAs, Bristol


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