From this week, annual pension statements will have to reflect the fact that no further contracting-out rebates will be paid into defined-contribution policies after April 2012. Existing funds built up to date will not be affected by the change.
After April 6, 2012, people in defined-contribution schemes will no lon- ger be able to contract out of the state second pension and get contracted-out rebates to build up protected rights in a private sector pension. Instead, they will automatically rejoin the state second pension, increasing their state pension entitlement.
Projected private pension benefits will fall because annual statements have previously had to assume anyone who is contracted out of S2P will remain so until retirement and that contracted-out rebates will continue until then.
The falls in projected pension benefits will vary depending on the value of the existing fund, proportion of protected rights contributions compared with additional contributions the individual is making and length of time to retirement.
Aegon says people who have not built up a big pension fund and who pay low contributions compared with their contracted-out rebates and have a long time to retirement will see the biggest reductions. Head of business regulation Steven Cameron says: “Advisers could start getting calls from worried contracted-out clients when their next pension state- ment drops through the letterbox. The key for advisers is to look at their clients’ state and private pension benefits together to get a full picture of what they can expect in retirement.”
Intelligent Pensions technical director David Trenner says: “This will have an impact on employers running contracted-out money-purchase schemes and is another example of unintended consequences of legislation. The employer will need to explain now why projected pensions will be lower and again in 2012 why pension contributions and National Insurance deductions are changing.”