Royal & Sun SERPS alert

Royal & SunAlliance has written to all its customers currently contracted out of the state earnings related pensions scheme (SERPS) warning they might be better off contracting back in.

The move is further evidence the Government risks reversing its objective of shifting the pensions burden away from the state and onto private savings.

R&SA says its calculations suggest Government rebate levels may not be generous enough to justify remaining contracted out and some are likely to boost their pensions by contracting in.

SERPS applies to those earning over the lower earnings limit- currently £72 per week. These individuals are normally entitled to a pension in addition to their basic state pension made up of their own and their employer‘s NI contributions.

Contracting out of SERPS means you stop earning any pension in SERPS and instead, after the end of the tax year, the Inland Revenue rebates some of the NI contributions to a personal pension. There are around 3m individuals currently contracted out of SERPS.

The question mark over SERPS has resulted from the Government chipping away at the level of rebates over the years, making it very difficult for individuals to work out whether contracting out will buy them a higher pension income.

Royal & SunAlliance asset accumulation leader Mark Birks says: “Its never been clear cut where the responsibility lies for alerting policyholders to this sort of issue, but we wanted to make sure we are meeting customers‘ reasonable expectations.”

Independent financial adviser Informed Choice managing director Nick Bamford says: “Most people make a one-off decision and unless there is a trigger to reconsider whether they ought to contract in again, there is a danger most policyholders will stick with their current position and risk losing out.”

Secretary of State for Work and Pensions Alistair Darling says: “State retirement pension will always be the foundation of income in retirement but this Government will continue to encourage those who can make extra provision for their retirement, to do so. Current rebates do not infringe this principle.”