Compensation for contracted out SERPS
Background of contracting out
Since April 1988 employees have been able to ‘redirect’ part of their National Insurance Contributions (NICs), and part of their employer’s NICs to a personal pension. This is instead of them being used to pay for additional state pension benefits under the State second-tier pension, previously termed ‘SERPS’.
Contracting out of SERPS explained
The benefits that accumulate under the State scheme build a higher level of annual pension yield that holds no relation or relevance to growth in any investment fund.
By contrast, benefits under the ‘redirected’ (or replacement) personal pension depend on the performance of the investment fund(s) and annuity rates when the scheme member starts to draw their benefits.
What has gone wrong with contracting out of SERPS?
Many advisers used actuarially-generated cut-off ages to ascertain whether a client would be likely to benefit from contracting out. Typically these cut-off limits suggested that females under 40 and males under age 45 should contract out.
Unfortunately, many ‘investors’ were not warned that the balance between contracting out and ‘staying put’ would ultimately depend not only on the investment growth during the lifetime of a personal pension, but also annuity rates when the pension fund is converted to an annual income.
Could the investor have grounds for SERPS compensation?
With these warnings, an individual can make a valued judgement as to whether they are prepared to take a risk by contracting out.
Without these warnings, the individual must accept the adviser’s recommendation, totally unaware of the important risks. It is people in this category (i.e. contracted out of SERPS with insufficient guidance and warnings at the outset) that may now find they would have been better off remaining in the State scheme rather than transferring to a personal pension.
Contact us now for a free initial assessment of SERPS claims to see if you could be in for compensation.