Mixed messages are confusing both consumers and financial advisers alike in the decision on whether to contract out of the State Second Pension (S2P), formerly SERPS.
Providers such as AXA Sun Life and HSBC are suggesting that contracting out is a poor decision whereas Standard Life suggest that there are particular ages when contracting out may be beneficial and other ages when contracting in would be beneficial. These are known as pivotal ages.
Our view
Firstly, you need to understand what contracting out is. When you pay National Insurance contributions part of these contributions go to pay for the NHS etc but part of them go to pay for you Basic State Pension and an additional, earnings related pension on top called the State Second Pension (S2P). You can elect to have part of the NI that you pay for S2P directed into your own private pension plan. Many of you may have seen figures in your pension statement relating to GMP (Guaranteed Minimum Pension) and Protected Rights. These are contracted out NI contributions.
Making a decision on whether to contract out or not is a very close decision at the moment as projected pensions both from the State and from private pensions are very similar. We believe that you should perhaps think of it another way. Who do you trust more to offer you this second level pension - the State or an Insurance Company? Sorry a tough decision - trusting the hungry lion or the wolf?
We suggest you take advice. Visit our Help Zone to find out about all the different ways we can offer advice and guidance.
Why not visit our new State Pensions Centre in the Pensions Adviser.com to learn more about state pensions and contracting out. You can even obtain a free state pension forecast.