Are You Contracted Out?

A two-year investigation has shown that the financial services industry is not guilty of widespread mis-selling of contracted out state pensions. Makes a change!

A couple of years ago City watchdog, the Financial Services Authority (FSA) began an investigation into the sale of policies used to opt out of the Second State Pension (S2P), following concerns that 'contracted out' savers had been wrongly advised.

Thankfully, the FSA has now concluded that there was no widespread mis-selling of these policies -- known as Appropriate Personal Pensions -- although it says that around 120,000 people may have been wrongly advised.

The idea behind contracting out is that instead of building up an earnings-related pension top-up through the government, some of your National Insurance contributions could be invested along with your personal private pension contributions. In theory, you'd make more money by controlling your own investments rather than leaving it to the government.

There was, however, a pivotal age - generally 50-55 for men and 45-50 for women - where it usually didn't make financial sense to contract out. Opting out was for younger people who would have more time to take advantage of stock market growth over the longer term.

Nevertheless, even the 120,000 people who may have been wrongly advised to opt out because they were possibly too old to benefit may have had good reasons to opt out nonetheless. For example, contracted out pension contributions can be left to dependants if you die before retirement whereas those in the Second State Pension can't.

These days it's thought you might be better off sticking with the government rather than contracting out, regardless of age. Indeed two years ago Norwich Union and the Prudential insurance companies began telling customers to contract back in.

Nevertheless, although it would appear that policies were not generally mis-sold, the 120,000 people who may have been badly advised could find themselves on average £7 a week down during retirement compared to the amount they would have got if they'd remained with the government.

However, the consumer organisation, Which?, believes that as many as 4.5 million people may be affected and says that anyone who has previously been advised to opt out should contact their pension provider and ask for a personalised statement. It should compare the projected income from the contracted out pension with the amount they would have received from the government.

The FSA is planning to publish a step-by-step guide towards the end of the month to help people establish whether they were mis-sold. You can pre-order a copy from the FSA's Money Made Clear website.