Thousands of people have contracted out from part of the State pension scheme, but how many know whether their decision will lead to them being better off financially in retirement? Not many, we believe.
The Pensions Policy Institute recently undertook research into not allowing people to contract out of any State pension. The PPI said that by abolishing the right to contract out would lead to fewer burdens on employers having to at least replace what the State would have provided. They also believe that by not allowing contracting out, any review of pensions or National Insurance would be easier.
A number of pension providers have advised their policyholders to contract back into the State system, as they believe contracting out to be poor value for money. Royal & Sun Alliance went one stage further and told policyholders that they would be contracted back in, unless they received written confirmation not to.
Our View
Deciding whether or not to contract out of the Second State Pension (formerly SERPS or the State Earnings Related Pension Scheme) is very complex and no one knows whether they will be better off financially until retirement. Many advisers will not now give advice on whether or not to contract out because there really is no way of comparing the two, without a considerable amount of work involved.
We believe that many people who contracted out via a personal pension or stakeholder pension will be worse off in retirement because investment returns have just not been high enough. Additionally, any policy charges and poor fund performance will increase the deficit that people could receive.
We would suggest that everyone reviews their decision to contract out.
Learn more about State Pensions in the State Pensions Centre.