Contracting out of the state second pension scheme stops

Charles de Lastic, Managing Director of Bluebond Financial Planning, explains the implications and why you may need pensions advice.Bluebong Financial Planning provide a range of financial services in St Albans.

 

The government has decided from 6^th April 2012 to stop allowing employed people to choose to opt out of the Second State Pension (S2P) unless they contribute to a Final Salary (Defined Benefit) pension scheme.  From that date, the National Insurance rebates will no longer be paid to your personal pension scheme. 

 

You should consider now how you are going to manage in your retirement and seek pensions advice from an independent financial adviser.

 

What if I’m contracted out?

If you are currently contracted-out of S2P using a personal pension (Defined Contribution), this means that from the 6^th April 2012, you will be contracted back in and have no choice but to build an “entitlement” to the State Second Pension.

 

Now, the value and growth of a personal pension is based on the underlying assets it holds, and in current conditions many people would have lost money on the value of their pensions.  However, it is still your own ‘pension pot’ which cannot be taken away from you and good pensions advice can help you maximise what you can achieve from any ‘pot’ you have.

 

So, where’s the issue?

The problem is, by having no choice but to be tied into the government scheme, the money is no longer in your personal ‘pension pot’ but is subject to a future government agreeing to actually pay you the ‘entitlement’ you have accumulated.  The issue here is that there is no separate government pension pot in existence – the S2P is paid out of the current taxes and NI contributions.

 

With an increasing older population, will the tax intake be enough in future years to pay out your accumulated ‘entitlement’?  I personally would not depend on it.  If this is currently your only retirement provision, I urge you to seek independent financial advice with pensions advice top of your discussion list.

 

If you’d like more information on financial planning or would like to contact us for independent financial advice and pensions advice, please visit the Bluebond Financial Planning website.