IT was confirmed last week that from next April employees who have
opted out of the State Earnings Related Pensions Scheme (Serps) who are
over the age of 30 will get an extra 1% bonus on top of their national
insurance contribution rebate paid into their personal pension plans.
This is the first sign that the Government has accepted the arguments
of the insurance industry, led by Legal and General, for the
introduction of age-related national insurance rebates. Indeed it is an
essential step if the Government is going to avoid older employees
opting back into Serps and defeating the whole purpose of its original
opt-out incentives.
Since 1988 it has no longer been compulsory for employees to be
members of the second-tier state pension Serps. The main reason is that
with the number of retired people growing steadily and set to reach
13.5m by the year 2035, the Government foresaw a huge state pension bill
ahead. So it decided to encourage people to opt out and start paying
into their own private pension plans instead.
To give people an incentive to opt out, the Government offered to pay
a rebate of the national insurance contributions that would have gone
into Serps, plus an extra 2% per annum bonus into a personal pension
plan of your choice. However, the extra 2% per annum bonuses are due to
cease on April 5, next year.
The Government's campaign to get people to opt out of Serps has been
very successful but very costly. Over five million employees have done
so at a cost to the Government of some #9000m in rebates and incentives.
Until now everybody who has opted out has received the same rebate,
even though it costs more to provide the same amount of pension the
older you get. This made opting out especially advantageous for younger
people and increase the likelihood that their personal pension plan
would provide a better pension than Serps. For older people this
approach was less favourable and meant that it was not worth opting out
after age 45 if you were male or 40 if you were female.
From next April when there will only be a 1% bonus for the
over-thirties, the recommended age limit for opting out will come down
further. Peter Timberlake of Legal and General says: ''We would advise
that anybody considering opting out of Serps for the first time, for
example as a result of a change of job, should only do so if they are
under 40 if they are male or under 35 if they are female.'' So where
does this leave people who have already opted out of Serps and are now
approaching the original upper age limits? Should they opt back into
Serps?
Peter Timberlake says: ''It is probably worthwhile for people who
would have opted back into Serps at this time to hang on a bit longer.
The new 1% bonus for the over-thirties will be paid for three years
until 1996 and we believe that thereafter the Government will introduce
an age-related rebate, say in five-year bands which will make opting
back into Serps unnecessary in the future. If you were to opt back into
Serps now and then back out again in three years time, you would incur
extra charges on your personal pension plan.''
Ron Spill of Legal and General estimates that such a change to
age-related rebates would mean that instead of the 5.4% rebate that the
under-thirties will get from next April and the 6.4% rebate you get if
you are older, teenagers may get just two percent while those in their
sixties would get 11%.
Whatever your age, there are no guarantees that the retirement income
you get from a personal pension will be any better than a Serps pension.
A Serps pension is calculated as a percentage of your earnings. With a
personal pension much will depend on the insurance company's investment
performance but even with good results the pension you will get from a
rebate only scheme is unlikely to be a great deal higher than Serps.
In order to improve your pension prospects substantially you will need
to make your own contribution to your pension plan. It is estimated that
so far only around a third of employees who have rebate plans are
topping them up with further savings.
Apart from boosting your pension an advantage of adding your own
contributions to a personal pension plan is that you will have more
flexibility about when and how to take those benefits. A personal
pension funded by national insurance rebates cannot be taken until
official state retirement age and must be taken as pension. A pension
based on your own contributions can be taken at any time after age 50
and part of it can be taken as a tax-free lump sum.
A personal pension is a very tax-efficient way of saving for
retirement. The premiums qualify for tax relief so if you are a basic
rate taxpayer every #7.50 you save is topped up to #10 once tax relief
is added back. In addition, the investments within your pension plan do
not suffer any tax.
The limit on pension contributions that qualify for tax reliefs varies
with age. Up to 35 you can save 17.5% of your earnings, thereafter it
goes up to 20% until age 45 and it continues to increase until it
reaches 40% at age 61.
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