Contracting out of the State Earnings Related Pension (SERPS)
last updated June 2007
Since 1988 it has been possible to contract-out of SERPS (now the State Second Pension or S2P) using a personal or stakeholder pension. Once contracted out, a person's National Insurance contributions are paid as a rebate directly into their chosen personal or stakeholder pension fund.
Whether a person might benefit from contracting out would depend on a number of factors, including:
- their own personal circumstances;
- the amount of rebates paid into their personal or stakeholder pension fund;
- how well the pension fund investments grow – as with any investment, there will always be an element of risk because the value of investments can go down as well as up;
- how much the pension provider charges for looking after the pension fund;
- annuity rates at retirement;
- whether the person makes additional contributions on top of the rebates paid by the State; and
- any changes to government policy over the period.
Someone who has contracted out can change their mind and contract back into SERPS/S2P, though SERPS/S2P will not apply for the period during which they were contracted out.
Over time the Financial Ombudsman Service has received a number of complaints from consumers who complained they had contracted out on the basis of unsuitable advice from a financial adviser.
In 2006 the consumer body Which? wrote to the FSA suggesting that the issue of contracting-out of SERPS should be dealt with under the wider-implications process.
The FSA responded to Which?, noting that both it and the Financial Ombudsman Service had agreed that the issue was one with wider implications, and that the FSA was looking into potential regulatory issues associated with past contracting-out at that time.
The FSA completed its investigation into past selling of pension policies used to contract out of SERPS/S2P in May 2007. The FSA found no evidence of widespread customer detriment. There was evidence of poor sales practices, but in many cases the advice given was not inappropriate.
The FSA did identify, however, a small group of consumers (less than 2% of the total sales made) who were at higher risk of receiving inappropriate advice. This group was advised to contract out between 1988 and 1997 when they were over the pension provider's "pivotal" age (ie the age above which it was no longer generally deemed financially advantageous to contract out). The FSA has published a factsheet [PDF version opens in new window] to help consumers among this group consider whether they may have been given inappropriate advice, and if so, how they can complain. Some firms have reviewed some of their past sales of contracted out policies and the FSA will continue to monitor complaints in this area in case it indicates issues in regard to the sales made by particular firms.
The FSA has decided not to issue guidance to firms, nor to provide input to the Financial Ombudsman Service under the wider implications process in relation either to liability or assessment of redress. The Financial Ombudsman Service will continue to consider cases it receives as it has been doing, reaching a decision in each case on its own merits.
Where individual consumers are concerned about the advice they received, they should complain to the firm who provided the advice. If they are not satisfied with the response they receive, they can take their complaint to the Financial Ombudsman Service.