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Life offices face pension perils in contracting clients into S2P

A leading pension adviser is warning that significant numbers of investors who are being arbitrarily contracted back into the state second pension by life offices could be worse off than if they stayed contracted out.

Richard Jacobs Pensions & Trustees director Richard Jacobs says some of his clients are far better off contracting out. A number of life offices, including Axa and HSBC Life, have unilaterally contracted back in their contracted-out scheme members.

But the move could result in future misselling claims, warns Jacobs. He says one of his clients, a man aged 42 investing his pension in Legal & General’s with-profits fund, would be 50 per cent better off contracted out even if a conservative assumed growth rate of 3 per cent after charges is applied to his pension pot.

By retirement, the client would be losing 914 a year by being contracted out, according to Government calculations. If the National Insurance rebates achieve the assumed growth rate, this would be worth 1,536.

Jacobs says: “Insurance companies are saying you are better off contracting back in but the worry is that clients will be worse off and will be coming back asking why they were contracted back in. The insurers are frightened to death because of the regulators.”

An FSA spokeswoman says: “There is no concrete evidence of misselling around either contracting in or out.”

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