A report commissioned by the Financial Services Authority (FSA) has claimed that rebates for contracting out of the Second State Pension need to be at least 40-50% higher than current levels to ensure similarity.
While examining the contracting out field for 2005 and 2006, the report found that in almost every way, an investor would be better off in S2P, rather than contracting out with rebates at their current levels. The research showed that those who contracted out of Serps in 1988, and remained out, have potentially suffered an underperformance average of £4 per week in their pension. Those who did contract back in have suffered an average loss of £2 per week in their pension.
The Association of British Insurers have responded to the FSA's report with an outline for keeping and reforming contracting out, agreeing that rebates need to be higher in order to simplify decisions on contracting out for both consumers and advisers. They have suggested that the S2P become a flat-rate scheme, and when entitlements are calculated, the ABI believe that it should be as if everyone earned £15,000 per year, regardless of actual income.
Our view
If the Government does not wish people to be a burden on the State in later life, action is needed now. At this stage, the numbers are very simple, most should contract back in to the State Second Pension.
What is contracting-out? Visit our State Pensions Centre in the Pensions Adviser.com.
Need some advice? Free Consultation.
Search the news archive for more on Pensions.