Norwich switches thousands back to state top-up pension

Norwich switches thousands back to state top-up pension

Britain's biggest insurer, Norwich Union, yesterday announced plans to automatically switch thousands of its pension policyholders back into the top-up state pension.

The company's decision follows similar moves by other firms and represents the emergence of another pensions headache for the government.

It comes amid growing concern that many people could be worse off in retirement as a result of opting out of Serps, the state earnings-related pension scheme, and taking up the offer of government payments into their own private pensions instead.

The action Norwich Union is taking affects about 40,000 pension customers who are "contracted out" of the state second pension, which is the successor to Serps.

Contracting out means that an individual gives up some or all of their Serps entitlement and builds up a replacement for it in a separate scheme. If they contract out via a personal pension, the government rebates some of their national insurance contributions into their plan.

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The idea is that these are invested and should grow to more than the value of the state provision given up. But stock market falls and a slump in annuity rates have thrown this theory off track.

Norwich Union said changes in the economic environment had eroded the potential benefits of contracting out and the "vast majority" of policyholders - no matter what their age - should rejoin the state second pension.

Customers who were sold their pension policy direct by a Norwich Union adviser, and those who have no adviser registered to their policy, will now automatically be contracted back in, unless they contact the company to say they wish to remain contracted out.

It is urging the remaining customers to get financial advice. Many people bought their pension from an independent financial adviser, and Norwich Union said it hoped they would be getting advice from them.

The company will begin contacting customers over the summer to notify them of its plans. They will be given six weeks to respond if they want to remain contracted out.

Guardian Unlimited © Guardian Newspapers Limited 2005