Millions safer with State pensions

MILLIONS of workers persuaded to switch from a State pension scheme to a private plan have been told they could be better off changing back.

Pension firms are warning many savers that their private investment will fall short of what they would get from the Government.

Companies including Norwich Union, Standard Life and Prudential, are telling customers who opted out of the State Second Pension (S2P) to seriously consider returning to the scheme.

Other workers who have similar pensions with other financial services companies are also expected to be advised to go back into S2P.

It is another blow to millions who had hoped for a better income in old age than the State could provide, and will fuel the pensions crisis which has left many facing financial hardship when they retire.

The warning from pension firms is also a huge setback to the Government's aim of transferring provision to the private sector.

On top of the basic State pension, everyone earning more than £79 a week and not contracted-out of S2P by being a member of a private scheme, is building up a second, smaller pension paid for with National Insurance contributions.

The scheme, formerly called the State Earnings Related Pension Scheme (Serps), is designed to top-up the basic pension.

Financial analysts said S2P could be worth up to £100 a week, but many people would get much less. Payouts depend on earnings and the number of years worked.

However, six million workers opted to take their S2P contributions as a rebate from the Government and invest them in private schemes in the hope of a better return.

Now, following warnings on investment shortfalls, Labour faces a mass migration back to the State scheme, which uses taxpayers' money to fund NI contributions to pay for S2P.

Norwich Union will say that it 'strongly recommends' all customers who opted out of the State scheme prepare to go back in.

Iain Oliver, head of pensions, said: 'As a big player in the industry we are taking a lead and making a responsible decision we believe is in the best interests of our customers.'

Standard Life, which has hundreds of thousands of pensions customers, is advising most to 'seriously consider' going back into S2P.

A spokesman said: 'If clients continue to opt out of the State scheme they do run the risk of getting a lower pension.'

Prudential, which has 500,000 pensions savers, is advising many of its older customers to switch back to S2P. Unless they specifically tell the insurer they want to remain opted outthey will be automatically returned to the State scheme.

The Pru said younger people should also 'consider their situation'. Legal & General is also telling pensions clients to 'consider their options'.

The warnings will confuse many customers, leaving them to make the final decision about what to do with their savings.

Mick McAteer, financial services specialist at the Consumers' Association, said: 'The pensions situation is in crisis, and this change will leave people even more bewildered. It may well be best for them to opt back into the State scheme rather than gamble on the stock market. But I fear that this could be a pre-emptive move to head off legal action against them (companies) for mis-selling pensions.'

The Association of British Insurers said pensions customers should be advised to 'consider' whether they would be better off in the State system.

A spokesman added: 'We want to make sure people are aware of the issues so they can consider them and, if necessary, seek advice on what they should do.'

Some experts say that insurers are 'frightened of being accused of mis-selling products if the contracted out pension fails to match what the State pension would have provided'.

Insurers were caught up in a pensions mis-selling scandal in the late 1980s and early 1990s.

Workers were encouraged to move out of - or not take up - company pensions in favour of private ones, many of which later told customers there would be shortfalls.

Now there will be concern that people were wrongly encouraged to leave S2P for private schemes.