View more on these topics

Serpentine sums

The decision on whether to contract out of Serps and invest the rebates in a personal pension was fairly straightforward in the past.

Based on the earnings and risk profile of a client, a pivotal age was calculated to find the point beyond which contracting out of Serps became less attractive than opting in.

But things have changed and the criteria are not clear-cut. A suitable recommendation is difficult to assess.

Fundamental changes

The introduction of the state second pension and the revision to the level and format of contracting-out rebates makes it essential to review clients who are already contracted out using an appropriate personal pension or stakeholder plan.

This is also an opportunity to review clients who have not yet contracted out.

The introduction of stakeholder has meant that product providers have revised the terms of their new products used for contracting out and for some of their existing plans.

These changes can have a significant effect. For example, investing rebates in a stakeholder with an annual charge of 1 per cent or less may tip the balance to contracting out.

A structured approach

The position of clients who are contracted out has to be reviewed and advice will need to be given on whether:

•Clients should remain contracted out or contract back into the state second pension.

•If they remain contracted out, whether they should continue with their existing personal pension policy or redirect future rebate contributions to a new one.

•For clients who are not contracted out, some of the lower-charge personal pension or stakeholder plans now available, together with the revised age related rebates, may make contracting out a viable option.

What information do advisers need to provide the appropriate advice and to meet the compliance requirements? I would suggest the following in a structured report format:

•A comparison of the benefits which might be obtained from a personal pension if a client is contracted out with the estimated additional state second pension if contracted in.

•The comparison should include a review of the position under the existing product, if the client is currently contracted out, and also under alternative products.

•With an understanding of the client&#39s attitude to risk, a suitable recommendation can then be made.

To obtain and collate manually the relevant information into a client report could be time-consuming. Technology can help to provide the information in a clear, concise report.

One such example is the contracting-out guide available to IFAs via The Exchange&#39s Exweb portal. The reports can show a comparison of benefits which might be payable if a client is contracted out, with the estimated additional state second pension if contracted in.

Multiple product-charging structures, including any current appropriate personal pension, can be included in the comparison and the results for each product can be shown in a number of ways.

•Individual years – the potential percentage gain or loss from contracting out on the basis of a 1 per cent real return and a 3 per cent real return, until the date the pension becomes payable, as required by the FSA illustration rules. The results can be shown for the current and subsequent four tax years.

•Cumulative over term – the potential cumulative gain or loss over a number of years, also presented in a tabular format (see table on left). The results are colour-coded to show gains (green) or losses (red).

There has been much discussion over the poor value of National Insurance rebates. Industry representatives have gone as far as to suggest that it would be beneficial for all men and women who have contracted out to contract back in.

However, it can be strongly argued that the decision is not that straightforward and the decision on contracting out must be assessed on an individual basis. Age, gender, earnings&#39 levels and the client&#39s attitude to risk are the key considerations.

With the help of specialist software tools, it can be demonstrated it may be appropriate for clients to contract out or remain contracted out until they are into their mid-50s for men and late 40s for women, provided that a real rate of return of 2 per cent or more is considered reasonable.

It should be recognised that, in the case of the S2P, the “real rate of return” has to be measured against average salary increases and not merely against the retail price index. The S2P earned in any year is increased in line with national average earnings each year up to state pension age. National average earnings&#39 increases are published as section 148 orders, which have consistently been higher than the increase in RPI.

A specialist calculation tool for contracting out can save advisers time and effort, providing clients with a clear, well-structured report and, importantly, helping to meet compliance requirements.


IFAP bringing in leads for £23m commission

Over 315,000 people contacted IFA Promotion last year to look for an IFA, producing up to £23m in commission and £16.5m in profit for members. According to research by actuaries William M Mercer, the total of people approaching IFAP was up by 20 per cent to 315,000 from 263,000 in 2001. Of those people contacting […]

Driving down costs

Most of the post-Sandler debate on the UK mutual fund industry has focused on increased transparency, price caps and the issues raised by a new breed of low-cost, no-advice products. But I have been struck by the lack of discussion on what all this means for the future cost base of the industry. My perception […]

A walk in the perks

I want to provide employee benefits to keep key personnel within my company. What is the most cost-effective way to do so? What dangers are there if I keep costs to a minimum? I hear that salary sacrifice is a great way for me to save corporation tax. Is this true? The level and type […]

Abbey sells off First National to GE for £848m

Abbey National is selling its First National mortgage and unsecured lending business, which deals exclusively through intermediaries, to GE Consumer Finance, owner of sub-prime lender igroup, for £848m. Abbey says First National operates largely independently of the group&#39s other businesses, under its own brand and in different market segments where there were limited cross-selling opportunities. […]

Mark Page: why my biggest overweight stock is a discount Spanish retailer

Artemis European Opportunities Fund manager Mark Page is questioned about the merits of investing in Spanish supermarket group, Dia. Dia is a 7,000-store Spanish discount supermarket chain. But with cheaper food prices coming on to the market and an improving Spanish economy, journalist Alexis Xydias questions Mark about its inclusion in the Artemis European Opportunities […]


News and expert analysis straight to your inbox

Sign up


    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