Some people have still to take advantage of the terms. Others should think about moving back to the shelter of the state system.
Personal pensions were launched with a fanfare in 1988. The following typical cases illustrate how wide-ranging the changes will be.
Clare, a shop assistant now aged 33 and earning pounds 85 a week, thought about starting one but never got around to it.
Robert, a computer programmer now aged 45 and earning six times as much, did so but is now having second thoughts.
Almost all personal pensions involve contracting out of Serps, the state earnings-related pension top-up, which means the DSS collects the full rate of National Insurance contributions and transfers a slice to the pension. Since 1988, this 'rebate' has been set at 5.8 per cent of earnings above a lower limit roughly in line with the state pension. Of this 5.8 per cent, 2 per cent comes from the employee and 3.8 from the employer. The DSS adds another 2 per cent incentive, plus an element of tax relief which makes a total of 8.46 per cent. The minimum incentive is pounds 1 a week.
The Government has decided not to continue its generosity. The incentive will drop to 1 per cent, with no minimum, and will apply only to those over 30. The NI rebate will drop to 1.8 per cent for employees, 3 per cent for employers.
If Clare takes out a personal pension before 6 April, she will get the rebate and incentive for the full 1992-3 tax year. Despite this, it would be a bad idea. She would have to give up Serps rights for that year, and trust the investment skills of her pension provider to earn a larger pension.
Money invested in a pension when young becomes much more valuable than the equivalent amount put in when you are older. There comes a point when people would be better off with Serps than starting a personal pension. Optimistic pension providers have put that time - called the 'pivotal age' - at 50 or more for men and 45 for women. Providers who expected lower investment returns suggested that men over 40 and women over 35 would be ill-advised to contract out.
The less you are paid, the more cautious you should be because there is a high fixed cost involved in setting up a pension. Legal & General, for instance, advises anyone earning less than pounds 6,500 per annum to stay in Serps.
The changes in April alter all these calculations. If you expect average investment returns to be 2.5 per cent above inflation, Sun Life says men who are already contracted out should continue until they are 51, and women until they are 44. Men should not start contracting out above 47, and women above 40. And if you think investment returns may be only 0.5 per cent above inflation, men should not continue above 40 and not start after 35 while women should not contract out at all.
If you are one of the five million or so still in Serps, you should only think of opting out in the dying days of this tax year if you are below middle age and are well-paid. If you are afraid of losing your job or plan to leave it anyway, do not bother.
Many personal pensions allow you to stop and start contributions without penalty, but leaving gaps will mean less money is invested to earn a pension. If you are able to join a pension scheme run by your employer, you are probably better advised to do so.
If you already have a personal pension you are, like Robert, on the borderline. If he is optimistic about the future he can stay contracted out for a few more years, but if he is more cautious he should contract back in at the end of the tax year now that he is 45.
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