A bad risk for the low-paid

Thousands of people could still be putting their pension unwittingly and needlessly at risk by opting out of the state earnings related pension scheme (Serps ). This is a pension paid to employees on top of the basic state pension.

The Government introduced contracting out through personal pensions in 1988 as a way to cut the cost of state pension benefits. By encouraging employees to take more responsibility for their own pension, it hoped to avoid the build-up of a crippling pensions bill in a few decades' time.

Those who contract out of Serps receive a rebate of some of their National Insurance contribution. You can't get you hands on this money directly, but you can have the rebate paid into a personal pension.

To help get personal pensions off the ground, the Government also paid an additional incentive on top of this rebate. This was initially worth 2 per cent of band earnings - essentially those up to the National Insurance ceiling - and reduced to 1 per cent from the 1993/94 tax year. These incentives proved so popular that nearly 6 million employees signed up for a contracted- out personal pension.

However, concern is growing that many of those who contracted out were on incomes too low to allow them to benefit. The average earnings of men who have contracted out are under pounds 10,000, the average for women about pounds 6,300, and the amount of Serps rebate paid into their personal pension is too small for them to benefit after they have paid the charges made by the pension provider.

The chief financial regulator, the Securities and Investments Board, is investigating the size of the problem. "We've commissioned a firm of actuaries to talk to about 20 life insurance companies," says a SIB spokeswomen. "They've been looking at the number of policies sold, the charges made and the age profile of the policyholders." SIB expects to publish its findings by the end of the year.

It is also feared that others are neglecting to review their position. This is necessary because, say the experts, being contracted-out stops making sense around the ages of 35 for women and 40 for men. For those at this age who have previously contracted out, contracting back in may well be the best move.

The decision of whether to contract out, or whether you have now reached an age where you should contract back in, is further complicated by proposed changes to the rebates due to take effect in 1997. The Government is working on a scheme to give age-related benefits. In theory, this should make contracting out much more attractive to older people.