In? Out? The people who left Serps are shaken all about

Is HSBC too keen for its customers to opt back into the state pension?

Many people are confused about pensions, but most of us know we should opt out of the State Earnings Related Pension Scheme (Serps) and opt back in as we approach retirement.

So HSBC's decision to contract all members of its pension funds automatically back into the state second pension (S2P), which replaced Serps last April, is a controversial one. HSBC has written to customers with personal pensions informing them they will be contracted back into the S2P from 6 April, unless they tell the bank by 17 March that they want to remain contracted out.

HSBC may think that opting back into the state scheme is advisable, but most pension providers have thought the opposite since Serps was introduced in 1978 as a way of giving low and moderate earners an additional state pension.

"Under Serps, providing you earned less than about £9,000 and were under the age of 42 for women and 52 for men, you were better off out," says Tom McPhail, pensions research manager at independent financial adviser (IFA) Hargreaves Lansdown. "But S2P is much more opaque."

With Serps and S2P, if you opt out, you receive annual rebates on your national insurance contributions. These go to your pension provider to top up your personal pot, rather than towards a state pension. In the past, for most people, the projected value of investing this rebate in a personal pension was greater than if it had been invested in the state scheme, which is why you'll probably have been advised to opt out. Then as you neared retirement, you'd be advised to opt back in.

However, HSBC believes the rebate has diminished to such an extent that customers are likely to be better off in the state scheme. Since last April it has advised new customers to opt into S2P, and it is now extending this advice to existing customers.

"Over the years the level of attractiveness of the government rebate has diminished," says Harpal Karlcut, head of life and pensions at HSBC. "We review it each year, and until last year we set ages at which it was in the customer's interest to contract back into the state scheme. But now we believe it is no longer in the customer's interest to be out. Because it's such a complicated area and difficult to explain how these rebates are calculated, we decided to advise customers that we will be contracting them back in. Looking through our book of business, we calculated that no one would benefit more from staying out."

But not everyone agrees with this black-and-white view. "I think HSBC is being extremely rash," says Mr McPhail at Hargreaves Lansdown. "It's entirely appropriate for HSBC to write to customers and recommend that they think about contracting back in, but it's absolutely wrong for a bank that claims to be the world's local bank to make a [blanket] decision like this."

He argues that the issue of whether you should contract out of S2P is a complicated one. Rebates are calculated according to age, salary, what the gilt yield is likely to be on retirement, and investment returns before then. So people should seek advice on a case-by-case basis.

There is certainly little consensus among pension providers. The Independent on Sunday asked 14 companies about their current stance. Axa, Abbey National, Barclays, Scottish Widows, Prudential, Royal & SunAlliance and Standard Life are still advising people to opt out until they reach a certain age (ranging from 45 to 50 for women and 53 to 57 for men). Royal Bank of Scotland shares HSBC's view that contracting in is a better option, and Zurich doesn't currently offer a contracting-out product. Others are sitting on the fence.

Mr McPhail says your decision should be based on "the view you take on the perceived promises being made". There are risks on both sides. If you're contracted out, he explains, your money is in a pot with your name on it and what you receive in retirement will depend on its investment performance. Otherwise, you're trusting the government with your money. While at the moment you'll receive a guaranteed pension in retirement, this could change, depending on what successive governments decide to do.

It's useful to ask your pensions provider for a comparative illustration of what your pension is likely to be if you contract in or stay out. "This will be quite general and based on your age and earnings," says Mr McPhail, "but those numbers can help shape your thinking."