Release date: 16 January 2006

Information for IFA's

We review all of our contracted out Pension policies on an annual basis to determine whether it is still in our customers best interests to remain contracted out of the State Second Pension (S2P). The aim of contracting-out with us is to potentially provide a higher pension than the S2P.

Taking into account that people are living longer, annuity interest rates are lower and the size of future rebates, our Actuaries believe that it is unlikely that the rebates we receive in the future will provide a pension that will be higher than the benefits available under the S2P.

As a result we believe it is in the best interests of customers with Personal Pensions to contract back into the state scheme for the tax year 2005/2006 and going forward. We will be notifying Her Majesty’s Revenue and Customs of the change to our customer’s policy status in February 2006. We will no longer be offering the facility to contract out under a Personal Pension.

We will contact all of our customers by post to inform them of this change. We will also send a letter explaining the changes to servicing and scheme IFAs.

For more details on contracted-out personal pension plans, and what contracting back in means to your customers, please refer to the Questions and Answers section below:

Questions and Answers

How does this affect my customer’s state pension?
Your customer’s basic state pension will not be affected. If they decide not to contract out with another provider the rebates that used to be paid to us will instead be used to top up their State Second Pension. If they choose to contract out the rebates will be paid to the alternative provider instead.

What happens to the contributions you have already received in respect of the State Second Pension?
Payments already received will remain within the pension plan. As your customers policy is a unit-linked plan the value will vary according to the price of the unit. This will continue until the customer takes any benefits. There is also the option for your customer to transfer to another pension provider.

Is it possible to remain ‘contracted out’?
We have contracted all of our Personal Pension customers back into the State Second Pension as a result of the changes in mortality and lower annuity interest rates and taking into account the size of future rebates. We no longer offer these customers the facility to contract out of the State Second Pension. However, there is still the option to contract out with another pension provider.

Why did you not contract my customer back in sooner?
Our Actuaries advised us, at the end of 2005, of the effect of changes in mortality and lower interest rates. We also have to consider the size of future rebates. This means it is highly unlikely for our funds to outperform the State Second Pension. We have taken immediate action to contract our customers back in to the State Second Pension. Prior to this guidance there was no need for us to contract our customers back in to the State Second Pension.

Additionally, we have contacted all our contracted out customers on a yearly basis (either directly or through their Independent Financial Adviser) if it was felt that they should consider contracting back in, based on their age and earnings. We have also included contracting back in guidance with annual pension statements.

How will I/my customer know that HMRC has received form CA1543 (APP2) and my customer is now contracted back in?
Once HMRC has received our completed form CA1543 (APP2), they will send your customer form CA1720 (APP15) as confirmation that they are now contracted back in to the State Second Pension.

Can customers contract back out of the State Second Pension with you?
No, they will not be able to contract back out under their existing personal pension plan. However, they may be able to contract out again with another pension provider.

How can I find out what my customers state pension will be worth when they reach retirement age?
If you want a forecast of how much state pension your customer will get when they retire, call the DWP Retirement Pension Forecasting Team on 0845 6016335. However, you need to be aware that this forecast is not directly comparable to the private pension forecast, which customers receive from us each year.

The two forecasts are based on different assumptions. They cannot be compared to determine if customers would receive more money by staying in the State Second Pension than they would get if they decided to contract out.

Links

The Pension Service
FSA guide - ‘Contracting out of the State Second Pension'
What is your pension worth? - ABI and FSA Pensions Calculator