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Last Updated: Monday, 19 December 2005, 09:15 GMT
Pru backing state pension cover
A moneybox
Britons are increasingly attracted to the certainty of the state pension
Prudential, the insurer, is advising nearly half a million customers to opt back into the state second pension.

It says they will do better building up entitlement to a second tier of state pension benefits on top of their basic state pension than in a private scheme.

Previously, financial services firms advised people to contract out, which means the government gives their pension provider extra money to invest.

In 2002, State Second Pension replaced State Earnings Related Pension Scheme.

Falling incentives

People who contract out still pay the same rate of National Insurance but a portion of their payments, known as a rebate, is paid over to a pension firm of their choice as a lump sum each year.

Many people are automatically contracted out when they join their employer's final salary pension scheme.

Millions contracted out in the late 1980s as government incentives meant it was worth abandoning the State Second Pension (S2P) and having a bigger private pension instead.

But with falling incentives, concern has grown that many people who contracted out would have been better off remaining in S2P.

A year ago, Norwich Union - one of the UK's largest personal pension providers - told its savers that they should consider whether staying contracted out of S2P was a good idea.

The shift back into S2P also reflects a fundamental change in the UK's pension landscape.

Employers, in a bid to cut costs, have been busy replacing workers' final salary pension schemes with money purchase in recent years.

The former type of scheme, usually, contracts the worker out of S2P, while the latter keeps them in.

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