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State pension reforms could spur contracting-out “bonanza”

Government plans to reform the basic state pension could result in a two-year contracting-out “bonanza”, according to Hargreaves Lansdown.

The proposals, to be put forward in a green paper later this year, would combine all current elements of the state pension into a single universal payment of £140 a week. This could involve the abolition of the state second pension by the end of this Parliament.

Hargreaves Lansdown head of pensions research Tom McPhail says: “Depending on the terms of the review, this news could mean a last bonanza for contracting out into a money purchase pension. For the next two years investors can still receive rebates into their Sipps or personal pensions.

“If they are ultimately going to receive a universal state pension benefit then these rebates could be ‘free’ money.”

Final salary scheme members could see National Insurance payments rise by 1.6 per cent as a result of the reforms, McPhail adds. Public sector workers, who are already facing a 3 per cent increase in contributions following Lord John Hutton’s independent report, will be particularly affected.


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. How will these new proposals affect the people who have deferred receiving their state pension? Will their pension rise to keep the differential between basic and deferred pension or will some of it be swallowed up in the £140?

  2. Lets not forget that if this goes ahead without any adjustment, those who’ve contracted out for years will have a nice protected rights pot/pension as well as receive a state pension that includes S2P. So a hike in their future NI conts in line with those who’ve been contracted in is a small price to pay!

  3. Surely it will not be retrospective? Surely it will just be a line drawn in the sand, similar to S2P/SERPs accrual? I don’t think the govt would be stupid enough to miss a good few thousand in S2P pot per person.

  4. So all those clients we advised to remain contracted in to the government’s “guaranteed” second pension will have lost a fortune.

    I wonder who will have to defend complaints? I am sure it will be the FSA who published the guidelines for us to follow…

  5. What about all of those big insurance companies who blanket contracted everyone back in because it was their ‘policy to do so’ and people only stayed contracted out if they did something about it. Many didn’t understand the letters so were contracted in on the actions of the insurers not through choice – whole can of worms!!

  6. ScepticalOptimist 25th October 2010 at 1:41 pm

    Free money and thousands recommended to contract back in over the years. I’m off to set up a website offering to help the masses who were mis-sold SERPS/S2P when they could have built up thousands of free money in PR pots, for a fee of course. Copyright pending!

  7. I am aged 66 and receiving state pension and the second pension for staying in the scheme.
    This adds up to substancially more than £140 proposed,does that mean I lose it surely even the Tories wouldnt do that.

  8. “If [those who contract out] are ultimately going to receive a universal state pension benefit then these rebates could be ‘free’ money.”

    After 20+ years of contracting out on a money purchase basis, I wouldn’t bet money on it being quite that simple, Tom. D’you really think the government will provide a beefed up flat-rate basic state pension for everyone and just forget about all that’s gone before? I don’t.

  9. There is nothing like pension simpification.

    What a waste that exam was then.

    So we will now have to revisit all our clients and charge them a fee to consider their next move.

    A great way to keep in touch with your clients and do new business.

  10. This cannot make sense as they would also have to disregard all DB and DC protected rights money accrued by 2012 ! A huge number

  11. Hello M Selby,
    I am also retired and get more than £140 on the 2nd State Pension. I can’t believe they are going to ‘rob’ us of the extra money. I have emailed my MP and asked him to draw this to Vince Cable or whoever, before the Green Paper later this year. Suggest you do the same.
    Regards – Cynthia

  12. As far as I can see – having checked a number of newspapers and websites – there has been no official announcement from the government.
    I found a BBC item which featured an interview with Vince Cable but this gave little in details. Moreover some of the articles stated that SERPS/ S2P amounts would be preserved. There’s a lot of misinformation stemming from a Daily Mail article.

    At the end of the day we all need to wait until the Green Paper is published and then criticise (if there are grounds to do so).

  13. Brian A Aspinwall II 26th October 2010 at 10:51 am

    You should consider this from the view point of the people that this is going to help. Millions of people who were never going to be in a position to build up enough contribution years to receive the full SP, many of them ignorant of that fact until they reach NRA. £140 per week may not amount to much in your eyes but it is Gods send to those at the bottom of the pension chain. This will bring some dignity to many people.
    It is only a matter of time before the Ambulance Chasers will be targeting Financial Advisors on this subject. Not so long ago we were talking about it might have been wrong to contact people out of SERPS and now it might have been wrong to have taken them out of contacting out.
    If we have learnt from the past we will have our documentation and records in good order, even to the point of including the current laws in place and what the regulator was advising us at the time of sale.
    I never complain about all the meddling that goes on by the Government in our pensions. They have created work for me and the rest of our industry as far back as I can remember and hopefully for the rest of my working life.

  14. If Vince Cable is behind this then it must be remembered that he does have a habit of changing his mind and then back again.

    For reasons why I find difficult to understand he has gained a certain reputation which this change will sorely test. It is one thing to have a jolly good idea and quite another to implement it.

  15. Peter Davies @ Create Wealth 26th October 2010 at 12:02 pm

    On first reflection the introduction of an across the board £140pw State Pension sounds interesting. However, as with all the changes introduced by government there will be winners and losers. With the UK having seen considerable immigration in the last 5 to 10 years many people have questioned the fairness of new UK residents qualifying for a State Pension having only spent a few years in the UK and contibuted very very little. I wonder if the UK will then have a population infux to take advantage of such generous terms which would put further added pressure on the country’s finances. I also wonder what provision would be put in place for individuals who have built up large SERPS and S2P benefits to a monetary weekly pension figure far greater than the £140pw. A lot for the government to work on. My only worry is that they havent had a very good record of yet in thinking through the process of change; take the Child Benefit fiasco for starters.

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