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Working Lunch Thursday, 13 March, 2003, 16:15 GMT
Confusion over second state pension
Man with pension pot
Simon Gompertz
HSBC is herding pension customers back into the second state pension.

Relying solely on private pensions, according to the bank, doesn't make sense.

"We are automatically contracting our customers back in," says HSBC. About 27,000 of them are being sent letters this month.

The move is a kick in the shins for the government.

The message from HSBC is that incentives intended to encourage people to provide for themselves are no longer enough.


The second state pension is the successor to Serps, the top-up pension scheme provided by the state and related to earnings.

In 1978 people with final salary pensions provided by their employers were allowed to opt out of the scheme.

The government paid a regular rebate into their company pensions, to compensate for the loss of state pension rights.

Then in 1988, the Tory government allowed savers with personal pensions to opt out as well.

The rebate was set generously high and it helped to kick-start the boom in personal pension sales in the late 1980s and 1990s.


But times have changed. First there was the pension mis-selling scandal.

Personal pensions were sold to people who shouldn't have had them.

As a result, no pension provider or financial adviser wants to risk giving the wrong pension advice.

Then the government reduced the rebate - or bribe, as some people call it - paid into the personal pensions of pension savers who contract out.

From last year, it was much harder to judge whether contracting out was worthwhile.

Investment risk

And now the stock market has bombed, highlighting the investment risk involved with personal pensions.

Tom McPhail
Tom McPhail: Rash move
But pension adviser Tom McPhail of Hargreaves Lansdown told Working Lunch he thought HSBC's move was rash.

"In order to benefit from the second state pension what you're relying on is that a government a long way in the future will honour the promises made to you now," he says.

"That's what your expectation is if you stay in the second state pension.

"If you contract out you get a lump of money paid directly into your pension. It's put in a pot with your name on it where no one else can get at it."

Different approach

Every major pension provider appears to be adopting a different approach in the debate over contracting in and contracting out.

  • The Pru is mailshotting women over 50 and men over 55 advising them to contract back in to the second state pension.
  • Scottish Widows is suggesting women of 42 and over, and men aged 42 to 48 and over 53 should contract back in.
  • Norwich Union isn't pushing customers either way. It is left up to them to seek other advice.

    Malcolm McLean. Opas
    Malcolm McLean: Depends on circumstances
    Malcolm McLean of the Pensions Advisory Service says that the decision to contract in or contract out has to be made on an individual basis.

    "It depends on your age, it depends on your earning capacity and your attitude to risk," says Malcolm.

    "The closer you are to retirement, generally speaking, the better you are being in the state pension scheme."

    Legal & General has sent out a letter warning customers that remaining contracted out could be a mistake.

    But it is left up to them to do something about it.

    The whole issue is as clear as mud for bewildered savers.

    To be safe, everyone needs to take a careful look at whether the state scheme suits them or not.

    The BBC's Simon Gompertz
    "The government's 'bribe' has become less generous"
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