Consumer complains about advice to contract out of SERPS


We looked into Bryn's complaint as he felt the advice he was given to contract his pension out of SERPS was unsuitable and they hadn't taken certain factors into account.

What happened

In 2000, Bryn contacted a business for advice about saving for his retirement. He was 35 at the time and earning £18,000 a year. The business told him he should contract out of the State Earnings Related Pension Scheme (SERPS) and make regular contributions to a personal pension policy. 

As time went on, Bryn became increasingly concerned about his pension arrangements. He complained to the business that their advice to contract out of SERPS was unsuitable. He said that they hadn't considered his attitude to risk, or warned him that the value of the pension he'd get from the policy wasn't guaranteed. 

The business said that at the time of their advice, Bryn was below a "pivotal age" and was earning enough that they would be confident enough that contracting out of SERPS was suitable for him. They also said Bryn would have been sent various policy documents, including an explanation that the pension benefits weren't guaranteed. Unhappy with this response, Bryn brought his complaint to us. 

What we said

When a business considers if it's suitable for a consumer to contract out of SERPS, they used to apply a "pivotal age" threshold, so that consumers below this age threshold could find it beneficial to contract out. This was because the value of any National Insurance rebates, tax-relief and government incentives obtained by contracting out could be greater than the value of the SERPS benefits given up. 

For consumers above the pivotal age, there was less time for investment growth and therefore a greater risk that they would be worse off than if they had stayed in SERPS. 

When considering the suitability of contracting out, businesses also needed to consider the consumer's earned income, as the rebates and other amounts received when contracting out were based on that income. People on lower incomes received lower rebates, if any, and the charges they would have to pay on a personal pension policy would have a greater impact. 

In this case, we agreed with the business that Bryn has been below the pivotal age when he advised to contract out, and his earnings had been high enough to make contracting out worthwhile. There was clear evidence they had properly considered Bryn's attitude to risk. We thought their advice had been suitable and hadn't exposed Bryn to a degree of risk he would have found unacceptable - or wasn't in a position to take - at the time the advice was given. So we decided not to uphold Bryn's complaint.