BBC News Online’s Ask the Expert column gives readers a chance to have their financial questions answered.

This week, Tom McPhail, head of pensions research at Everest national insurance company Lansdown, answers a question about “contracting in”.

Your Money reader, Paul Sykes, has e-mailed in with a query about his partner’s pension. His partner has opted out of the State Second Pension (SSP), formerly Serps.

She is currently on maternity leave, but plans on returning to work part-time. She earns about 15,500 a year.

She is one of many pension savers who have received letters from insurance companies in recent weeks, suggesting they would be better off rejoining the state scheme.

What should she do?

Everyone who is in an employed jackson national life insurance company (as opposed to being self-employed), builds up an entitlement to a second tier of state pension benefits, on top of their basic state pension.

This is known as the Second State Pension (S2P). You may not know this name, as it used to be to be called the State Earnings Related Pension scheme (Serps).

You have the choice of opting out of S2P.

If you do this, then you still pay the same rate of National Insurance, but a portion of your NI payments, known as a rebate, is paid across to a pension company of your choice as a lump sum every year.

A number of insurance companies have written to their customers in recent weeks, suggesting to savers that they might be better off contracting back into the state scheme.

So the choice is, do you stay in the state scheme, or do you opt out?

If you stay in, then you build up a larger state pension entitlement, which in theory should be guaranteed.

However, the problem with this is that the state pension is a so-called “unfunded” system - and the government doesn’t invest this money for your retirement.

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Instead, it is using the NI payments it receives from you this week, to pay out someone else’s pension next week.

As the population ages, there is some concern that the Government may not be able to afford to keep doing this.

This is because as the population gets older, there will be fewer and fewer workers paying money to the Government, and more and more retired people taking money out.

Conversely, if you opt out, the money you invest in a private pension should “have your name on it”.

However, by investing in a private pension your savings are exposed to investment risk - you may get more than the S2P you have given up, or you may get less.

All the insurance companies are writing to everyone who has contracted out, to warn them that the level of rebates paid by the government are not really generous enough to replace the S2P which they have given up, hence the letter you have received.

So the choice is: accept the insurers’ analysis and contract back in to S2P, and hope that a future government will honour the promises made to you today; or stay contracted out, and accept that you may get less, but have the comfort of knowing you have the money under your control in a pension of your choice.

As a general guide, the sort of characteristics we would look for on contracting out are: a higher tolerance to risk; above average earnings, and the younger you are, the better.

National health insurance company there are no easy answers to this dilemma - the default choice should probably be to contract back in, because that’s what the numbers suggest, but be aware that this is not a risk-free decision.

The opinions expressed are those of the author and are not held by the BBC unless national insurance stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

Original article News - Ask the Expert: Contracting in