Prudential advises clients to contract back in to S2P

Prudential will be writing to almost half a million customers who are contracted out of the State second pension (S2P) to say they strongly believe they should contract back in for the 2005/2006 tax year onwards.

The company is planning to send letters to 440,000 contracted-out customers with updated information and views to enable them to make an informed decision.

In the letter, Prudential say they strongly believe most people should contract back in for the 2005/2006 tax year, as they think the rebates paid by the Government will provide clients with lees than they would receive from the S2P at retirement.

Prudential will add that if clients contract back in, they can always contract back out at a later date, and that the decision will only affect future rebates, as all previous rebated paid into a pension plan will remain invested.

The letters also highlight some of the key differences between the two positions, including that by contracting out, a pension is not guaranteed as it depends on investment performance, but that on the plus side you can take up to 25% of the pension fund as tax-free cash.

However Prudential points out that financial advice will not be provided by the company as part of the mailing and that customers should seek independent financial advice if necessary before they make a final decision.

Tom Boardman, director of policy development at Prudential UK, says the company is supportive of the concept of contracting-out as they believe it helps to spread the cost of future Government pension promises as well as allowing people to take greater personal ownership of their pension arrangements.

But he adds: “It is important that individuals are adequately incentivised for the risks being taken by opting out of the S2P. Our view is that the rebate levels for the 2005/2006 and 2006/2007 tax years will not provide a sufficient incentive for the majority of our customers to remain contracted out.”

If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email nyree.stewart@incisivemedia.com

Categories: Investment

Topics: Prudential|contracting out|pensions