IT was confirmed last week that from next April employees who have

opted out of the State Earnings Related Pensions Scheme (Serps) who are

over the age of 30 will get an extra 1% bonus on top of their national

insurance contribution rebate paid into their personal pension plans.

This is the first sign that the Government has accepted the arguments

of the insurance industry, led by Legal and General, for the

introduction of age-related national insurance rebates. Indeed it is an

essential step if the Government is going to avoid older employees

opting back into Serps and defeating the whole purpose of its original

opt-out incentives.

Since 1988 it has no longer been compulsory for employees to be

members of the second-tier state pension Serps. The main reason is that

with the number of retired people growing steadily and set to reach

13.5m by the year 2035, the Government foresaw a huge state pension bill

ahead. So it decided to encourage people to opt out and start paying

into their own private pension plans instead.

To give people an incentive to opt out, the Government offered to pay

a rebate of the national insurance contributions that would have gone

into Serps, plus an extra 2% per annum bonus into a personal pension

plan of your choice. However, the extra 2% per annum bonuses are due to

cease on April 5, next year.

The Government's campaign to get people to opt out of Serps has been

very successful but very costly. Over five million employees have done

so at a cost to the Government of some #9000m in rebates and incentives.

Until now everybody who has opted out has received the same rebate,

even though it costs more to provide the same amount of pension the

older you get. This made opting out especially advantageous for younger

people and increase the likelihood that their personal pension plan

would provide a better pension than Serps. For older people this

approach was less favourable and meant that it was not worth opting out

after age 45 if you were male or 40 if you were female.

From next April when there will only be a 1% bonus for the

over-thirties, the recommended age limit for opting out will come down

further. Peter Timberlake of Legal and General says: ''We would advise

that anybody considering opting out of Serps for the first time, for

example as a result of a change of job, should only do so if they are

under 40 if they are male or under 35 if they are female.'' So where

does this leave people who have already opted out of Serps and are now

approaching the original upper age limits? Should they opt back into

Serps?

Peter Timberlake says: ''It is probably worthwhile for people who

would have opted back into Serps at this time to hang on a bit longer.

The new 1% bonus for the over-thirties will be paid for three years

until 1996 and we believe that thereafter the Government will introduce

an age-related rebate, say in five-year bands which will make opting

back into Serps unnecessary in the future. If you were to opt back into

Serps now and then back out again in three years time, you would incur

extra charges on your personal pension plan.''

Ron Spill of Legal and General estimates that such a change to

age-related rebates would mean that instead of the 5.4% rebate that the

under-thirties will get from next April and the 6.4% rebate you get if

you are older, teenagers may get just two percent while those in their

sixties would get 11%.

Whatever your age, there are no guarantees that the retirement income

you get from a personal pension will be any better than a Serps pension.

A Serps pension is calculated as a percentage of your earnings. With a

personal pension much will depend on the insurance company's investment

performance but even with good results the pension you will get from a

rebate only scheme is unlikely to be a great deal higher than Serps.

In order to improve your pension prospects substantially you will need

to make your own contribution to your pension plan. It is estimated that

so far only around a third of employees who have rebate plans are

topping them up with further savings.

Apart from boosting your pension an advantage of adding your own

contributions to a personal pension plan is that you will have more

flexibility about when and how to take those benefits. A personal

pension funded by national insurance rebates cannot be taken until

official state retirement age and must be taken as pension. A pension

based on your own contributions can be taken at any time after age 50

and part of it can be taken as a tax-free lump sum.

A personal pension is a very tax-efficient way of saving for

retirement. The premiums qualify for tax relief so if you are a basic

rate taxpayer every #7.50 you save is topped up to #10 once tax relief

is added back. In addition, the investments within your pension plan do

not suffer any tax.

The limit on pension contributions that qualify for tax reliefs varies

with age. Up to 35 you can save 17.5% of your earnings, thereafter it

goes up to 20% until age 45 and it continues to increase until it

reaches 40% at age 61.