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Morning all

 

Way back in 1998 I contracted out of SERPS with a GA personal pension plan. I received a statement yesterday from Aviva saying that plan isn't even worth the amount I have paid in so far which doesn't fill me with confidence when the projections they give are based on a 7% return. I can't really blame Aviva for poor performance as I know what is happening on the markets but I guess what I would like to know is whether I should be contracting back in to the state pension to at least guarantee myself an income. I seem to recall when I took out the plan, the adviser telling me that the state pension wouldn't be around by the time I retire but I'm thinking that might not be true. I'm 31 now if that makes a difference.

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I think the state pension will still be around by the time we retire, it's just that the retirement age will be higher than it is now. There are lots of people who don't have a company pension or any savings at all, and the government surely couldn't just leave these people to starve in their old age!

 

I am contracted into SERPS and I think that is probably the safest thing to do for the majority of people (ie people in money purchase/defined contribution pension schemes). I know some people do contract out of SERPS if they are enrolled in a final salary/defined benefit pension scheme, but these are quite rare nowadays as most such schemes are closed to new entrants. People with final salary pensions will have a guaranteed income from their employer, but the rest of us won't, which is why we would need to rely on SERPS more. Your national insurance contributions will be higher if you contract in, but I think it's worth it if you get a higher pension when you retire.

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Thanks for your response LT but I think one of us may have some incorrect information here. My Aviva pot is made up solely of protected rights contributions (NI) so contracting back in to SERPS wouldn't increase my contributions. I'm still paying NI as normal but they are then being paid to Aviva... as I understand it anyway?! Can anyone confirm if this is the case?

 

My normal pension pot which I pay into monthly is with Standard Life so I have no idea if I can either transfer the Aviva pot to my Standard Life one or just contract back in.... and I don't know how I would go about contracting back in anyway lol. I might need to see an adviser about this to sort this out to avoid any heartache.

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Hi westmidsman

 

You are correct in believing that your contributions are in fact the diversion of your NI contributions into the AVIVA scheme. Your contributions would be the same contracted in or out.

 

If you want to contract back in you need to contact aviva (in writing) and tell them you wish to cancel your contracted out arrangement and contract back into serps again.

 

The current value of the fund depends where your investements are held For example it they are in a fund which is exposed to the stock markets then the value will obviously be lower at present. If you are buying units with your money you are buying more at present due to the lower values and an upturn in the markets will see a boost to the value of your fund.

 

Whichever way you are guaranteed an income and the million dollar question is will the income be lower or higher by contracting out. In theory you are in control of your own destiny by being contracted out because it cannot be taken away from you. In 35 years time who knows what the benefit of serps will be. In addition your fund has 35 years to grow as it is still early days and investment growth could be anything over that time.

 

The bottom line is that if we go back to high inflation and higher investment returns (which many people believe is inevitable)your decision to contract out could turn out right. However, if we end up with low returns for 35 years? then you may be worse off. In or out it is a gamble unless you have a crystal ball but personally I do not not believe that there will be a massive difference either way and you may feel it is worth the gamble for the next 10 years by being contracted out.

 

The main thing to remember is that as you get older the benefit of being out could get less so when you are over 40ish you need to take advice and at some stage contract back in.

 

Unless you have a financial review with a Qualified Independent Financial Adviser you will be on your own (almost) with your decision. The problem is it will be difficult to find one who is prepared to advise you for free and the cost of this type of advice would not be cheap unless you have an adviser at work or get lucky.

 

Thats my opinion but Heh - what do I know?

 

Regards

 

Pedross

 

If you find this advice useful please click my scales to thank me - I need the Rep!

Edited by pedross
spelling in case x20 checks!
  • Haha 1

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Sorry for the misinformation. When I wrote my original reply, I was thinking about employee pensions (ie occupational pensions). As you took out your pension as a member of the public, the rules about national insurance contributions would be different.

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Ah. My fault for not providing enough info.

 

Thanks for the responses though guys. Much appreciated. Think I'll shelve this for 10 years or so and look at it again then. Been paying into my personal pension since I was 20 so I'll always have that I suppose.

 

Can anyone confirm what the arrangement is at the moment? Is there a basic state pension which everyone gets regardless of contributons and then an additional amount based on your SERPS contributions. Also I read somewhere on the net that in 2012 they may be cancelling the option to contract out. Would this be for those wishing to newly contract out or would I automatically be contracted back in at this stage. Or is it not true at all?

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Hi LT

 

I am sure that westmidsman was pleased that you took the time to respond and in doing so it bumped the post up and brought it to my attention. Had you not done so I would not have seen it.

 

Hopefully, between the two of us he (presumably) has got enough opinions to make a decision. Thats why this forum works, the opinions of one person prompts other posters.

 

Together we stand! Divided?

 

Pedross

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Ah there you are

 

Everyone qualifies for the basic state pension. You then get an additional pension based on your NI contributions to make it fair for people who pay more contributions to get more than people who pay none.

 

Which is why serps - State Earnings Related Pension Scheme was set up. Your 'contracted in' benefits give you additional state pension. Your 'contracted out' benefits create a fund that you will use to buy additional pension with. I have already compared the two.

 

2012 is when changes occur in financial services. I will not bore you but I would not worry it will be mapped out for you if you are affected. You can find all the pension information you require and get a qoutation of your state retirement benefits here:

 

Pensions and retirement planning : Directgov

 

Regards

 

Pedross

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