Safety net is not that safe

A series on pension planning starts off by looking at the state benefits

THERE was a time when the plight of people struggling on an old age pension was a key issue at election time. But now the debate has moved on. It centres not so much on the value of today's pensions but of tomorrow's.

There is a consensus that the welfare state cannot pick up the tab for providing people with a decent income in retirement. In future, the state may provide just a safety net.

Everyone who is 20 or older needs to get a grip of the issues. There are long-term decisions to make now - even on what to do about the state pension. This has two broad elements: the basic pension and Serps - the state earnings-related pension scheme. The current maximum basic pension is pounds 58.85 for a single person, pounds 94.10 for a married couple (or twice the single-person rate if each partner qualifies in their own right). The current maximum for the Serps pension is pounds 94.14. These pensions are taxable. They can be drawn from the age of 65 for today's young workers, or at an earlier age for women currently older than 40.

These state benefits can provide an important element in a portfolio of pensions. And, at present, they have the advantage that they rise every year in line with inflation. But this is price inflation, not pay inflation. The latter has historically been higher. So the value of the state pension is being eroded as a proportion of pre-retirement earnings.

Now, and increasingly in the future, state pensions could well prove insufficient. Which is why joining a company scheme or personal plan is vital for most people.

The level of state pension depends on your National Insurance record. Broadly, to get the full basic pension you must have paid, or have credited, the right type of NI contributions for at least 44 years, or a bit less for women who are more than 40. An incomplete record will produce a lower pension.

The precise rules are complicated. But you can get a forecast of your likely pension entitlement from the Department of Social Security using form BR19, from any DSS office.

But if the rules for the basic state pension are complex, those on Serps are byzantine. Entitlement to a Serps pension depends on the NI you pay on "band" earnings - currently between pounds 58 andpounds 440 a week. Only Class 1 contributions count. Crucially, that means the self-employed are not building up any Serps entitlement.

Many people are automatically out of the scheme. They belong to a company pension scheme that is contracted out. It replaces Serps. But employees who are not in this position have a choice. They can stay in Serps, or contract out through a personal plan. You do not pay less NI by contracting out, nor does it cost you a penny. The Government pays money, related to your earnings, into a personal pension plan of your choice.

You contract out in the hope that invested contributions will produce a bigger pension than you would get by staying in Serps. But it is something of a gamble. There are two general rules. First, the less you earn, the less the advantage in contracting out. Personal plan charges become disproportionate for lower levels of contribution. Second, as you get older, contracting out becomes less attractive. Generally, people over 40 should think carefully before contracting out.

If you do contract out, you will reach an age at which it is right to rejoin Serps. Talk to an independent adviser on this.

q Next week: why company pension plans are a good bet.