Good news if you've ever contracted out of SERPS
By Tom McPhail, Head of Pensions Research, Hargreaves Lansdown - 22/09/2008
Have you contracted out of the State Second Pension or SERPs at any time in the last 20 years? New rules being introduced could allow you to breathe new life into your pension(s) and allow you to consolidate them into a single, easy-to-manage account.
Until now, the money built up in your pension from contracting out (often known as Protected Rights) has been limited to personal or stakeholder pensions. This has led to many people’s pension savings becoming fragmented and has restricted investors to the limited choice of mediocre funds offered by insurance companies.
What’s changed?
The government has decided to allow people to hold their contracted out pension in a self invested personal pension (SIPP). This means investors can transfer protected rights funds into a SIPP and take advantage of the wide investment choice they have to offer. For many this is also the first opportunity to fully consolidate all their private pensions into a single, easy-to-manage investment basket.
How much money could be involved?
The sums involved will vary greatly according to your individual circumstances. If you only opted out of SERPs for one year, then you may only have a few hundred pounds, perhaps a couple of thousand in your pension. Conversely, if you have been contracted out for all of the past 20 years, then you might have as much as £100,000 in your protected rights pension.
Why are these changes so important?
It comes down to investment performance. When people contracted out the government was quite miserly with the level of rebates it paid to protected rights pensions. This means that to make contracting out worthwhile you typically needed to get an investment return of six per cent or more after charges if you were to match the state pension you gave up.
Unfortunately, managed and with profits funds run by many insurance companies do not offer strong investment prospects for the future. Investors who want to get the most out of their protected rights – and who are prepared to take control of their investment decisions – should consider the wider investment choice a SIPP could give.
When do the rules change?
The rules come into effect on 1st October. If you want to know more you can download a free copy of a Guide to transferring protected rights at the linked site below. Request this guide and for a limited time Hargreaves Lansdown will also post to you a copy of a Guide to improving your contracted out pension.