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State Second Pension Pays More, Says FSA
By Phillip Inman, The Guardian
United Kingdom
August 23, 2005
The government came under intense pressure yesterday to investigate whether millions of personal pension holders were misled when they quit the state's top-up pension scheme, after a second report in a week showed they faced cuts in their retirement income.
A report for the Financial Services Authority revealed that people who contracted out of the State Second Pension (S2P), and its predecessor the State Earnings Related Pension Scheme (Serps), could be an average of £4 a week worse off when they retire. The report will make disturbing reading for ministers who are already aware of problems with the system.
A report published last week by Which?, formerly the Consumers Association, estimated that 4.5 million people who contracted out of the additional state pension into a personal pension were likely to lose out. It said some could lose up to £800 a year, with the over 50s being worst affected.
Which? issued a statement last night demanding the government issue immediate advice to personal pension holders to determine whether they should switch back to the state scheme.
A spokeswoman said the FSA report, Contracting out of Serps/S2P to an Appropriate Personal Pension: a Quantification of Relative Impact, highlighted how people who will be contracted out in 2005 and 2006 are likely to lose money. The report said: "Investors are, in all cases, likely to be worse off."
Only a minority of pension savers would emerge better off, but there was a wide range of outcomes depending on when individuals contracted out, how long they were contracted out for, how old they were when they contracted out and the performance and charges of the personal pension scheme they invested in instead.
The FSA said the situation had changed since a report commissioned in 1996 by the FSA's predecessor, the Securities and Investment Board, found most people who had contracted out of Serps would be better off.
Around eight million people have been contracted out of the additional state pension scheme at some point in the past and around three million people are contracted out of it at present.
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