Should I contract back into Serps?

By THIS IS MONEY
Updated:

 

I am a 45-year-old woman married with a final-salary scheme pension and am paying additional voluntary contributions. I also have a private pension which is contracted out to which I make no contributions. Should I contract back into Serps or stay as I am? V.J., Reading, Berkshire

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Des Hamilton, technical director at the Pensions Advisory Service, replies: You should be aware that the law is changing so that all contracting out through money-purchase schemes will cease to be allowed from April 2012.

So you will only be able to continue to do this for three more years, 2009/10, 2010/11 and 2011/2012.

This means the decision to stop now or continue is not that critical. Having said that, the decision whether or not to be contracted out can revolve around financial reasons and non-financial reasons.

The main non-financial reason is how convinced you are that if you are in Serps (now called the state second pension or S2P) and are not contracted out, that a future government will not change the rules to reduce what you will get, as has happened in the past.

The main financial reason is whether or nor you will get a bigger pension by being contracted out rather than by being in S2P.

This decision has in the past depended on an age after which the pundits say the financial factors favour being in S2P.

Many commentators now say contracting out is not financially favourable at any age and in recent times several insurance companies have written to all their contracted-out customers to advise them to contract back in.

Even among those who still think there is some advantage in being contracted out, few recommend it for women over 40.

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