Question
My question is regarding the SERPS pension. I'm not sure whether i am contracted in or out, or which is best.
I am 56 years old and in full time employment and i do not pay into a pension scheme. How do i find out which is best for me? Hope you can help.
Answer
Let’s start with the basics. The State Earnings Related Pension Scheme (SERPS) and the State Second Pension (S2P), which replaced SERPs on 6 April 2002, are available only to employees and intended as a top-up to the basic state pension.
The amount of extra pension you receive is based on your national insurance contribution history and earnings over your working life. The formula varies between SERPS and S2P, but basically takes your earnings between lower and upper limits then increases them in-line with national average earnings until your retirement date before multiplying by certain factors and dividing by the number of years you’ve worked.
If you decide to contract out then the Government instead makes a payment into a personal or stakeholder pension of your choice, the amount being based on your age and earnings. Rather than cover all the rates here, you can find full details on our state pension page – click the ‘show more details about contracting out of S2P’ link.
The advantage of contracting out is that it protects you from any future changes the Government might make to the way S2P benefits are calculated. Past changes that reduced SERPs benefits highlight this risk. Once you have hard cash in a contracted out pension it’s more difficult for the Government to meddle with it.
However the downside, and it’s a potentially big one, is that the amount of contracted out pension income you receive in retirement will depend on investment performance. If your pension fund performs badly you could end up far worse off than you would have been under S2P. Future annuity rates will also affect how much pension you receive.
Trying to work out whether it’s better to contract in or out is a minefield, because no-one knows what changes the Government might make in future and investment performance is hard to predict. Most financial advisers have given up making S2P recommendations fearing they’ll get slapped with a mis-selling fine years down the line for not anticipating the unknown.
It’s a silly, over complicated system that could benefit from an overhaul and a massive dose of common sense.
Meanwhile, what should you do? Unless you belong to a final salary pension scheme where your employer might have automatically contracted you out (don’t worry if this is the case, they still have to provide benefits similar to S2P) then it sounds likely you’re contracted in. Given you’ve only got 9 years until you reach state pension age (65 - male), it probably makes sense to remain that way. I don’t think the risks of contracting out, in the hope of earning slightly more than you’d otherwise get, are worthwhile.
To find out where you stand I’d suggest requesting a state pension forecast, which includes SERPS and S2P. It’s free. You can find more details and apply here http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast/DG_10014008.
My question is regarding the SERPS pension. I'm not sure whether i am contracted in or out, or which is best.
I am 56 years old and in full time employment and i do not pay into a pension scheme. How do i find out which is best for me? Hope you can help.
Answer
Let’s start with the basics. The State Earnings Related Pension Scheme (SERPS) and the State Second Pension (S2P), which replaced SERPs on 6 April 2002, are available only to employees and intended as a top-up to the basic state pension.
The amount of extra pension you receive is based on your national insurance contribution history and earnings over your working life. The formula varies between SERPS and S2P, but basically takes your earnings between lower and upper limits then increases them in-line with national average earnings until your retirement date before multiplying by certain factors and dividing by the number of years you’ve worked.
If you decide to contract out then the Government instead makes a payment into a personal or stakeholder pension of your choice, the amount being based on your age and earnings. Rather than cover all the rates here, you can find full details on our state pension page – click the ‘show more details about contracting out of S2P’ link.
The advantage of contracting out is that it protects you from any future changes the Government might make to the way S2P benefits are calculated. Past changes that reduced SERPs benefits highlight this risk. Once you have hard cash in a contracted out pension it’s more difficult for the Government to meddle with it.
However the downside, and it’s a potentially big one, is that the amount of contracted out pension income you receive in retirement will depend on investment performance. If your pension fund performs badly you could end up far worse off than you would have been under S2P. Future annuity rates will also affect how much pension you receive.
Trying to work out whether it’s better to contract in or out is a minefield, because no-one knows what changes the Government might make in future and investment performance is hard to predict. Most financial advisers have given up making S2P recommendations fearing they’ll get slapped with a mis-selling fine years down the line for not anticipating the unknown.
It’s a silly, over complicated system that could benefit from an overhaul and a massive dose of common sense.
Meanwhile, what should you do? Unless you belong to a final salary pension scheme where your employer might have automatically contracted you out (don’t worry if this is the case, they still have to provide benefits similar to S2P) then it sounds likely you’re contracted in. Given you’ve only got 9 years until you reach state pension age (65 - male), it probably makes sense to remain that way. I don’t think the risks of contracting out, in the hope of earning slightly more than you’d otherwise get, are worthwhile.
To find out where you stand I’d suggest requesting a state pension forecast, which includes SERPS and S2P. It’s free. You can find more details and apply here http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast/DG_10014008.
Read this Q and A at http://www.candidmoney.com/questions/question112.aspx
No comments:
Post a Comment