Should I stay or should I go?

Opting-out: Nic Cicutti looks at what the new rules will mean

The next few months will require an important decision by personal pension holders - whether new rebates paid if they opt out, or stay opted out, of the state earnings-related pension scheme make it worthwhile for them to do so.

When it was introduced by Barbara Castle in 1978, the aim was for Serps, together with the basic state pension, to contribute up to 45 per cent of an average salary before retirement. But within two years of the Conservatives taking office in 1979, the real value of Serps has been gradually cut back, so that by 2030 it will only be worth a small portion of its present value.

From 1988, to encourage more people to abandon Serps, which the Government considered a burden, it allowed individual employees to replace, or "contract out", of Serps. In exchange for doing so, part of their own and their employers' National Insurance contributions were rebated back into a personal pension.

The employee's own rebate also received basic tax relief, increasing its value. Most occupational pension schemes give employees the choice of opting out or remaining in Serps.

The rebate, paid by the Department of Social Security, was 5.37 per cent of so-called "upper tier" earnings", which stood last year between pounds 1,172 and pounds 23,660. Those over 30 receive an extra 1 per cent. A 35-year-old earning pounds 20,000 would receive pounds 1,077 from the DSS into a pension plan.

The decision to opt out of Serps depended on the period of time before retirement, within which the rebate had time to grow as an investment. Generally, the older a person the less beneficial opting out was, because they stood to gain little or even lose out the closer they were to retirement.

Many financial advisers would recommend that their clients opt out of Serps until they reached a "pivotal age", when they should rejoin and reap the benefits of both systems. The age was usually between 35 and 40 for men and 30 to 35 for women.

The DSS has acted to replace flat-rate rebates with age-related ones, with younger people receiving less. For example, a 16-year-old will receive a rebate worth 3.88 per cent of upper tier earnings, while those aged 46 or over will receive 9.48 per cent.

The same 35-year-old earning pounds 20,0000 would get pounds 835 in the 1997-98 tax year, increasing in subsequent years to reach pounds 1,590. The Government argues that the new system is fairer to people of all ages and more closely reflects the benefits of opting out of Serps.

In fact, it makes it more likely that people who have previously not found it worthwhile will now seriously consider opting out - thus removing themselves as "burdens" on the state. Indeed experts now believe pivotal ages have moved upwards, 50 to 55 for men and 43-47 for women.

So, should you opt out of Serps? Pension companies argue that doing so gives you more control over your money: men can choose to retire at 60, unlike Serps; they have a greater say in how benefits are paid to beneficiaries if they die before retirement; and they can decide on their fund's investment strategy. There is also the possibility of a bigger fund than Serps at retirement if investments grow substantially.

However, you should also remember that personal pensions involve a gamble. In this case, the size of the rebate is based on a complicated combination of assumptions by the Government actuary's department about inflation, how much salaries will rise above the prices index, what interest rates will be when a pension is paid and what management charges are levied on the pension fund.

If the assumptions are right, those who opt out will do well. If they are wrong, those who left the comfort of Serps for the thrill of an opted out pension will be wrong. It pays to discuss the issue in detail with an independent financial adviser (IFA).

For details of an IFA near you, call 0117 972.3333