The Government allowed individuals, for the first time, to leave SERPS (known as ‘contracting-out’) and have part of their National Insurance Contributions paid into a personal pension plan instead.
More than 5 million people have been contracted-out of SERPS at some stage during their working lives, and many still are.
It is now estimated by independent analysts that up to 4 million of these personal pension plans will provide much lower benefits than would have been payable from SERPS.
This is due to a combination of factors; namely: poor investment performance, high policy charges, and Government reductions in the premiums they pay to personal plans.
It is doubtful anyone who was advised to contract-out was warned of the risks. On the contrary, contracting-out was presented almost as a no-lose proposition: you didn’t have to pay a penny extra for it and you would be much better off in retirement as a result.
The major personal pension companies, aware of the problems that they have stored-up by wrongly contracting-out so many people, are now busy writing to policyholders recommending that they either return to SERPS immediately or run the risk of having a much lower pension in retirement. Not surprisingly, however, they are not telling anyone just how much of a loss they might already have suffered.
Unfortunately, there is no way of transferring your contracted-out personal pension fund back into SERPS.
The first step in the process is to find out whether you are a victim of mis-selling. The term mis-selling is a common one within the financial services industry and it basically means that the sales process did not follow all the selling rules laid down by the industry regulator.
Insurance companies, brokers and the banks and building societies that sold most of the personal pensions currently in force had to follow complex selling rules in each sale, but crucially many firms either did not understand them or were simply careless and made mistakes.
If you can demonstrate to the firm that the sales process didn’t follow the rules, then the company that sold your personal pension will not be able to argue that it did everything necessary to make sure such an arrangement was suitable for you. And if it cannot do that then your policy will automatically be deemed to have been mis-sold, and this is the key to winning compensation. Only in the event of a mis-sale is the firm duty bound under Financial Services Authority rules to check if you have suffered a financial loss and to pay compensation if so. In the vast majority of cases such “loss assessments” confirm that compensation is due.
Even if you are no longer contracted-out of SERPS, you can still challenge the advice you received.