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Planning your Financial Future| State Pensions Review | Review Pensions | Wealth Check
The State Second Pension (S2P) is the top up to the basic State pension, which replaced the State Earnings Related Pension Scheme (SERPS) and the Graduated Pension. It is there to top up the State pension for those earning above an annual minimum set by the Government. By opting out of this scheme, your entitlement to the basic State pension is not affected.
Successive Government’s want us to save more and are constantly pushing this. State pensions are not paid out of any pot; they are simply paid out of the stoppages to those who are currently paying tax and National Insurance. We now have the problem of an increasing amount of people taking out of the pot and less people paying in; more people are going to higher education and more are retiring earlier, so less National Insurance is being paid. Furthermore pensioners are living longer and the cost of living is increasing. In short, you are left with a demographic time bomb that someone will have to pay for.
Our Government is faced with the choice either of reducing State pension benefits, increasing the State pension age (SPA), increasing taxation, introducing compulsion into personal pension plans or a combination of these. Increasing taxation is politically unpopular and, at best, only a short-term answer. The same could be said for increasing the SPA.
Reducing pensions on its own could simply increase the number of pensioners reliant on means-tested social security benefits such as Pension Credit and the Government (and therefore the taxpayer) will end up paying out benefits one way or the other.
Compulsion is not only unpopular as it means a reduction in disposable income but it would also result in a reduction in consumer expenditure, which would slow economic growth and reduce the amount of tax collected. Therefore, Government policy has been to combine a reduction in State pensions with incentives to make private pension provision.
The S2P reduces benefits for most; bear this in mind as the potential benefit will increase or decrease based on future Governments and your views on the matter. There are many reasons for the S2P to be reduced further - SERPS was reduced 3 times for men and 4 for women! The Government has stated its intent to change S2P to a flat-rate scheme and this might affect S2P entitlements accrued prior to such a change.
The decision around whether or not to Contract Out is based mainly on whether or not you will be better in a private arrangement where the returns are dependent upon investment performance and annuity rates or whether you should remain in the S2P with certain guarantees.
To decide whether to Contract In or Out you should also consider factors such as:- your attitude to investment risk,
- the investment return you would need to beat the benefits provided by the S2P,
- your attitude to legislative risk (ie whether or not you believe the Government will keep their promises or u-turn),
- flexibility of benefits and
- long term interest rates at retirement.