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.”