Serps choices reviewed: Budget changes encourage early return to the state pension plan, writes Maria Scott

NORMAN LAMONT has thrown a spanner into the works for people agonising over whether they should join the State Earnings Related Pension Scheme (Serps).

The Chancellor has reduced likely returns from personal pension funds with his Budget measure that means they can reclaim only 20 per cent of tax credits on dividends instead of 25 per cent. As a consequence, some advisers are now recommending people to consider rejoining Serps at even younger ages than previously suggested.

Paul Greenwood, research actuary at William Mercer, said he now thought men aged 41 and over should rejoin Serps, assuming a projected investment return of 8.3 per cent. On this basis, women of all ages should rejoin.

Mr Greenwood said: 'Women are expected to live longer than men and they need more money to buy annuities. They need to get a very good investment return to make up for what they would otherwise buy in Serps.'

However, 8.3 per cent was a conservative assumption about investment growth in future, he said. On a likely return of 9 per cent, the picture changed dramatically. Women aged 38 and over should rejoin, as should men aged 47. These age limits were all a year lower than before the Budget.

At accountants Coopers & Lybrand, Patrick Wynne, a partner in the actuarial and benefit consulting division, was less specific about cuts in age recommendations but agreed that some people might want to rejoin Serps earlier. His pre- Budget recommendation for women was that they consider rejoining between 35 and 40 and definitely rejoin after 40.

Men should consider rejoining between 40 and 45 and definitely be back in Serps once past 45, he said.

Since 1988, the Government has paid people to leave Serps, by rebating money from National Insurance contributions (NICs) into private pension schemes. There has also been a special bonus payment to help lure people away from Serps.

From next month, NIC rebates are being reduced, and the bonus is no longer available - although there is still an extra 1 per cent for people aged 30 and over who have personal pension schemes.

This over-30 bonus does not apply to people paying into contracted-out money purchase schemes (Comps) run by their employers. These people need to consider rejoining Serps at slightly younger ages than those suggested by advisers for the people who are members of personal pension schemes.

Private pension schemes do not work in the same way as Serps. It is generally agreed that, beyond a certain age, money put into Serps will buy better benefits than the same contribution could secure in a private scheme. But age recommendations depend on the assumptions you make about a host of factors, such as investment returns, pension expenses, and the individual's likely salary increases before retirement.

Before the Budget, financial advisers and pension providers were already revising their recommendations downards because of reductions in National Insurance rebates.

Most are are erring on the side of caution when making their assumptions about investment growth, however, assuming it may be in single figures in future. This compares with years of double-figure returns in the 1980s.

The past is no guide to the future, but if you are optimistic about the way world stock markets are likely to perform you may think you are better off risking your money there than in the state scheme.

Ray Coles, managing director of GM Benefit Consultants, said: 'My own gut feeling is that most people can bank on getting something like 12 per cent, because with pensions you are talking about an untaxed fund.'

Some people will simply prefer to stay out of Serps because they are not confident it can deliver its original promise.

A decision to contract back into Serps does not necessarily mean stopping contributions to a personal pension, as it is still possible to make your own payments into a scheme.

Some advisers believe that women, particularly those of borderline age, would be best taking no action at all at the moment, since their pension positions will probably be affected by the Government's decision on how it is to equalise pension ages for men and women. An announcement is expected shortly. But a final decision could take some time to be enacted, and it could be unwise to delay making a decision on Serps until it is.

Those who want to contract back into Serps, need to complete a form, APP2, which is available from pension providers and administrators. People with personal pensions do not need to make any decision by 5 April, because their NI rebates are paid in a lump sum after the end of the 1993/94 tax year. As long as they make a decision by 5 April 1994, the money for the previous year will go into Serps.

Those in contracted-out money purchase company schemes need to make a decision before 5 April, however, because their rebates are paid monthly.

(Photograph omitted)