AXA has been the first pension provider to speak out regarding the merits of contracting in our out of the State Second Pension (formerly the State Earnings Related Pension Scheme or SERPS).
In their opinion, everyone that is contracted out should now contract back in. The statement follows research by AXA, estimating that in today's terms, a 30 year old male earning an average salary could receive a pension in retirement of around 14% less than the State would have provided.
AXA's Head of Pension Marketing Steve Folkard said: "Our analysis of the level of rebates suggests that, at current levels, no-one should contract out. Unless the levels of rebates are increased, anyone who is currently contracted out should contract back in.
Our View
If you contract out of the State Second Pension, this means that instead of the State paying you an additional pension related to your earnings when your retire, you take responsibility for it yourself. If you opt to contract out then a certain part of the National Insurance contributions you pay are rebated into your own personal or stakeholder pension.
By having the money directed to your own pension, you are no longer guaranteed a certain amount at retirement. What you get back will be affected by where your money is invested, how large or small investment returns are and the charges made to administer your pension.
Recently the decision regarding whether or not to contract out has, for some, boiled down to whom you trust the most to perform - the State or your pension provider.
Whether or not to contract out is a very personal decision and we believe that people should seek at least some guidance on the subject. By taking the decision to contract out you could be better or worse off in retirement, depending on how your rebates are invested.
Learn more about contracting in or out of the Second State Pension at the Pensions Adviser.com.