View more on these topics

Millions who contracted-in face up to £20bn pension hit

UK Currency Sterling Coins Money 480

Savers may have missed out on billions of pounds of extra pension contributions as a result of being contracted back in by their provider in the early 2000s following regulatory pressure.

Last week, the Government tabled proposals to introduce a new, single tier state pension worth £144 a week for future retirees. The earliest this reform will be introduced is April 2017.

As part of its state pension reforms, the Government proposes allowing those who contracted-out to build extra state pension entitlement up to the proposed single tier payment of £144 a week, alongside their contracted-out sums. Savers who were contracted-in will see future benefits capped at the £144 level, although they will keep benefits already accrued.

Aviva corporate benefits head of policy John Lawson says up to 2.5 million customers who had contracted-out through a personal pension were contracted back in by providers following misselling concerns and reports commissioned by Which? in 2003 and the FSA in 2005 suggesting this would be in savers’ best interests.

Experts say these people would have received around £1,000 a year on average in contracted-out rebates if they had not been contracted back in.

Lawson says: “Around 2.5 million people could have missed out on £2.5bn a year [in contracted-out rebates]. A lot of providers took the decision to contract people back in en masse in 2003/04, so over that eight year period you are talking about people missing out on up to £20bn as a result of being contracted back in to the state pension.

“Some people might not have lost everything because they have built up a state pension worth more than £144, and that extra money is now protected. So for some this money might not have disappeared down a black hole. But the contracted-in people have come out quite badly from the state pension changes.”

Around the time of the FSA work, Legal & General wrote to contracted-out customers informing them they would be contracted back in to the state pension unless they told the provider otherwise. Around 20,000 people were contracted-in as a result.

L&G pensions strategy director Adrian Boulding says: “The contracting-out rebates were thin and we took the decision that being contracted-in was likely to be in customers’ best interests.

“A lot of the people who contracted-out will have done better than those who contracted-in because they have their private pension and they can also build up to the £144 a week state pension.”

Scottish Widows head of pensions market development Ian Naismith says: “We wrote to customers suggesting they should consider contracting back in but we took the view it was their decision rather than ours, so we did not do it automatically.

“It was always going to be very difficult for the Government to deal with contracted-out people. We lobbied for a generous approach and I think that is what they have come up with.”

Syndaxi Chartered Financial Planners managing director Robert Reid says: “A lot of advisers realised you couldn’t make a decision on contracting-in based just on an analysis of the circumstances at the time. For many people staying contracted-out was the right decision because it gave you control of your money.”

An FSA spokeswoman says: “As Governments change pensions legislation from time to time, advisers need to check the advice they have given is still appropriate for the customer.”

A Which? spokesman says: “We did not provide any individual financial advice to consumers on changing their pension. We explained the pros and cons and advised people to take personal advice. We were clear that whether or not you should contract out of the state pension scheme depends upon your personal and financial circumstances.”


News and expert analysis straight to your inbox

Sign up


There are 23 comments at the moment, we would love to hear your opinion too.

  1. Whilst the article and therefore the headline may be accurate, coverage like this is one of the reasons investors often feel hard done by…. and seemingly none more so when it comes to pensions.

    People need to make decisions based on the facts at the time – it’s then dangerous to look back and identify how subsequent developments mean that they made the wrong decision.

    ….as we all know, hindsight is 20:20 vision.

    No doubt the CMCs will now engage of a round of ‘you were wrongly advised to contract in’ – perhaps targeting those people who have previously claimed they were wrongly advised to contract out!

  2. Let this be a lesson to our regulators. Judging any lifetime decision at a fixed short term interim point is misguided in the extreme.

  3. Just off to sell my L & G shares, toodle oo!

  4. As a consumer, I stayed contracted out as long as possible. The regulatory advice leaflet was highly misleading. For example, in the illustrations given, the numbers assumed that you had a spouse who would survive you etc. But this was in the very small print. Not having a spouse (I didn’t) completely invalidated the illustration assumptions. Other assumptions were very questionable. Plus there was no mention that your pension pot is yours and forms part of your estate, what you pay to the state is gone for ever. And much more!

  5. Typical Which cop out !!! Why anyone still listens to them is beyond me, They are more interested in getting magazine subscriptions.

  6. I gave advice on the pros and cons of contracting in and out and asked my clients to consider who they trusted least, insurance company’s and banks or the Government. The same Government which allowed women to opt out of paying a married womens stamp and therefore not qualify for a state basic pension (massive miss-sale)

    Naturally most of my informed clients remained contracted out and can now look forward to a higher income than they would have otherwise.

    Remember don’t be a fool take advice it might cost you money but can you afford not to

  7. As is always the case with Govt controlled matters, advice based on legislation at any time must be caveated with the possibility that policy might change. The clear principle here was this – contracting out was the bird in the hand, contracting-in was two in the bush.

  8. Simon Webster – If I was wearing a hat I’d tip it in your direction.
    You’re absolutely spot on and that sums up one of the major problems we’ve had with various ‘reviews’. You can’t properly judge the game until the final whistle blows

  9. We have a firm of contracting out misselling parasites sniffing around a case we did a few years ago for a former client.

    Can confidently tell them to do one now : )

  10. The FSA says “As Governments change pensions legislation from time to time, advisers need to check the advice they have given is still appropriate for the customer.” The trush is that the government cannot be relied upon not to meddle with pensions almost every other year. The only ‘advice’ I ever gave on the contracting-in/contracting-out decision was this – “Mr customer, I am not prepared to make a recommendation on this topic but all I would ask you is, would you trust the government to keep any promise it makes to you” – enough said !

  11. Led by monkeys I’m afraid.
    How on earth do you compensate anyone until the end result? Remember endowments being compensated after 10 years into a 25 year term. Some got paid compensation, kept their policies, got de-mutualisation payouts (Ala Standard Life), and recovered most of their lost positions. Crazy but monkeys often wa*k when they have nothing to do.

  12. “An FSA spokeswoman says: “As Governments change pensions legislation from time to time, advisers need to check the advice they have given is still appropriate for the customer.””

    What does that mean?

    Time-travel backwards and contract back out?

    Silly FSA comment.

  13. This is why the public should have an IFA.

    Contract in contract out my addvice has always been A bird in the hand is better than two in the bush.

    it was pretty obvious that the government would stop SERPS at some time in the future because of cost.

  14. That will be make the shortfall up & then pay a stupid rate of 8% then. Well would be if went to FOS!!!

  15. We too were in the camp of “we don’t have a crystal ball – do you prefer an insurance company’s investment performance, or a politicians promise”.

    While I couldn’t advise clients either way, I could only add that personally, right up to age 60 I was still contracted out.

  16. Typical Which?
    Stir the **** then claim it was nothing to do with them.
    They used to recommend Endowments too!
    The FSA are no better.
    The CMCs will have a field day.
    All that should matter is what was in force at the time. Unlike Which? and the FSA advisers do not have crystal balls!

  17. What a fantastic statement by Which?
    “We don’t give individual financial advice.”
    I have a bee in my bonnet about consumer advice groups that make sweeping statements about products (financial or other) and then step away from the repercusions of their statements.
    Don’t get me started on Martin Lewis. I seem to remember many years ago he suggested Icelandic banks were a cracking place to put your money because they were paying high interest rates.
    Anyone making statements and trying to point consumers in the right direction should be forced to issue their own disclaimers that point out that they aren’t qualified in any field and are just trying to make some money by selling magazines.

  18. this is trully horrendous

  19. Low earners who contracted out have their pension credit reduced by a large percentage of the extra income generated by the APP.

  20. My advice was, the regulator and government are asking us to persuade you to go back in.

    However lets look at how many times the Government have moved the goal posts so far.

    When the government moved the goal posts did things get better for you?

    If you trust your money to future governments? go in if not stay out.

  21. Terence P. O'Halloran 24th January 2013 at 1:54 pm

    “I told you so,” but then, I have become used being ignored over the years. In 1994 I took on the Consumer’s Association now: “Which?” as the LIA’S vice president.

    That was in the wake of pensions mis-selling, the ‘contracted in’ ‘contracted out’ controversy and endowments. At that time I was holder of the Advanced Financial Planning Certificate. I was well on the way towards my Fellowship at the Chartered Insurance Institute. I had been a Practitioner for almost twenty five years and Pension Spokesman for the Federation of Small Businesses for a similar period of time. I and like minded people were ignored.

    Why is it that ‘people’ give credence to poorly educated, counterfeit authorities?

    All of the major players in the life assurance and pensions industry are only too anxious to satisfy the voice of a counterfeit ‘shepherd’, the FSA, with its staff’s poor or irrelevant qualifications, a lack of sufficient understanding of history and the aptitude and attitude of a megalomaniac with no constraining forces.

    Between them Which? and the FSA have created mayhem and now a Which? spokesman is quoted as saying: “We did not provide any individual financial advice.”

    What the hell do they think their magazine does? If it does not provide advice what does it do? Most of the people employed by that organisation that I have met, and I have met quite a few of them, are chancers, politically inspired academically inept chancers. And now look at the damage that has been done to pension provision.

    Well perhaps you will listen to me, and others like the Institute for Fiscal Studies now. Go back to Barbara Castle’s 1978 model and deliver to the population of the United Kingdom the benefits that the National Insurance Scheme promised them. Lifetime contributions buy a full pension. Anything short of that buys a lesser pension. It is an insurance principle.

    Give women with children up to nineteen years free contributions whilst they look after their family. That was in the original model. Ditch means testing. If you want to provide a pensioner’s uplift then do it through Social Services and taxation, not through the National Insurance Scheme. It is in the name ‘NATIONAL INSURANCE.’

    Basically, if it ain’t broke don’t fix it and with £38 billion supposedly in the National Insurance bank it is not broke.

  22. Although Mr. O’Halloron (above) is pretty obviously a master of his domain, he is placing far too much emphasis on naming conventions.

    For example, ‘National Insurance’.

    As one of those oily politicians stated almost from the start back in the 1950’s, “there ain’t no fund’.

    So, I am not sure where £38 billion NI is stashed and anyway, if it truly existed, then the Government would be solely tempted to use it to keep the interest-on-the-national-debt wolf from the door for a few more months.

  23. Gareth E K Smith 25th January 2013 at 6:15 pm

    Conversation in the treasury,


    “You know how this year we used Post Office pension fund to reduce the deficit, well there are billions sat there in Insurers Protected Rights Pots,”

    I just wonder

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm