Release date: 16 January 2006

We review all of our contracted out Pension policies on an annual basis to determine whether it is still in our customers best interests to remain contracted out of the State Second Pension (S2P). The aim of contracting-out with us is to potentially provide a higher pension than the S2P.

Taking into account that people are living longer, annuity interest rates are lower and the size of future rebates, our Actuaries believe that it is unlikely that the rebates we receive in the future will provide a pension that will be higher than the benefits available under the S2P.

As a result we believe it is in the best interests of customers with Personal Pensions to contract back into the state scheme for the tax year 2005/2006 and going forward. We will be notifying Her Majesty’s Revenue and Customs of the change to our customer’s policy status in February 2006. We will no longer be offering the facility to contract out under a Personal Pension.

We will be contacting all of our customers by post to inform them of this change. A letter explaining the changes will also be sent to any affected IFA’s.

We strongly recommend that you consult a Financial Adviser for professional guidance in considering what future option you should take. If you do not currently have a Financial Adviser, please visit our How to – Locate a Financial Adviser section for more information.

For more details on contracted-out personal pension plans and what contracting back in means to you, please refer to the Questions and Answers section below:

Questions and Answers

What is the State Second Pension?
For employed people, the state provides a benefit at retirement, which consists of the basic old age pension and an earnings related portion of the State pension scheme. From 6 April 1987 to 5 April 2002, the earnings related portion was known as the State Earnings Related Pension Scheme (SERPS). From 6 April 2002, this changed to the State Second Pension. Throughout this page, we will refer to the earnings related portion as the State Second Pension.

As it stands, the amount of earnings related pension a person is entitled to at state pension age is proportionate to their earnings through their lifetime. This is only available to people paying class 1 National Insurance contributions, which normally means employed people. There are some exceptions where people who do not receive earnings are entitled to receive benefits from the State Second Pension e.g. carers.

What does ‘contracted out’ mean?
From 1988, customers were able to contract out of the earnings related portion of the State pension scheme, using their personal pension plan. They did this by completing form CA1542 (APP1). This means that they gave up their entitlement to the State Second Pension, and instead opted that HMRC should send us money (known as ‘minimum contributions’ or ‘rebates’) for investment in their personal pension plan.

How does this affect my state pension?
Your basic state pension will not be affected. If you decide not to contract out with another provider the rebates that used to be paid to us will instead be used to top up your State Second Pension. If you contract out with another provider the rebates will be paid to them instead.

What happens to the contributions you have already received in respect of the State Second Pension?
Payments already received will remain within the pension plan. As your policy is a unit linked plan, it will vary according to the price of the unit. This will continue until you wish to take any benefits. There is also the option for you to transfer to another pension provider.

Does this affect my regular pension contributions?
Contracting in to the State Second Pension again does not affect your regular pension contributions.

Will you transfer all of the rebates invested in my policy back into the State Second Pension?
No, money already with us will remain invested in your pension. This will continue to be invested so that it can be used to provide you with a pension income when you retire.

I do not pay anything to you, so why have you written to me?
You do not pay contracting out rebates direct to us from your own bank account. The payments are received from HMRC in respect of any National Insurance contributions that you have paid for that year.

Can I transfer my past SERPS/State Second Pension money back into my state pension?
No. It is not possible to individually reinstate past SERPS/S2P benefits.

Was it wrong for me to contract out with you in the first place?
No. Any advice you received would have been based on your personal circumstances at that time. The fact that people are living longer, and that annuity interest rates are lower, could not have been foreseen.

What if I wish to remain ‘contracted out’?
We have contracted all of our customers with Personal Pensions back into the State Second Pension as a result of the changes in mortality and lower annuity interest rates. We no longer offer customers the facility to contract out of the State Second Pension under a Personal Pension. However, you do have the option to contract out with another pension provider.

Why did you not contract me back in sooner?
Our Actuaries advised us, at the end of 2005, of the effect of changes in mortality and lower interest rates. This means it is highly unlikely for our funds to outperform the State Second Pension. We have taken immediate action to contract you back in to the State Second Pension. Prior to this guidance there was no need for us to contract you back in to the State Second Pension.

Additionally, we have contacted all our contracted out customers on a yearly basis (either directly or through their Independent Financial Adviser) if it was felt that they should consider contracting back in, based on their age and earnings. We have also included contracting back in guidance with annual pension statements.

How will I know that HMRC has received form CA1543 (APP2) and I am now contracted back in?
Once HMRC has received our completed form CA1543 (APP2), they will send you form CA1720 (APP15) as confirmation that you are now contracted back in to the State Second Pension.

When I contract back into the State Second Pension, what happens to the payments that you will no longer receive?
The payments that would have been forwarded to us will now be paid to HMRC and provide the earnings related portion of the State pension scheme at the state pension age, for the tax year you are not contracted out.

Can I contract back out of the State Second Pension with you?
You will not be able to contract back out under your existing personal pension plan, however, you will be able to contract out again with another pension provider.

How can I find out what my state pension will be worth when I reach retirement age?
If you want a forecast of how much state pension you’ll get when you retire, call the DWP Retirement Pension Forecasting Team on 0845 6016335. However, you need to be aware that this forecast is not directly comparable to the private pension forecast, which you receive from us each year.

The two forecasts are based on different assumptions so they cannot be compared to determine if you would receive more money by staying in the State Second Pension than contracting out.

Links

The Pension Service
What is your pension worth? - ABI and FSA Pensions Calculator