They will regularly send you one of these to protect themselves. As they've basically made you aware of the risks by doing this.
I used to work in Financial Services before children and this is what we used to tell people:
The essential question is whether or not it is likely that your National Insurance Contribution (NIC) rebate for a particular tax year will produce a personal pension greater than the amount of S2P pension given up on contracting out.
The NIC rebate is age and salary related and therefore, subject to attitude to investment risk, the ages below that generally recommended that an individual consider contracting out is 50ish but varies from provider to provider.
This is also an emotive decision depending on whether you trust the Government of the day or, due to the rapidly increasing aging population, it can afford to pay everyone their State pension entitlement.
Current opinion, based on the size of the recently reviewed rebates and the outlook for lower bond and equity yields generally suggests that remaining contracted in or contracting back in to S2P is appropriate for most people.
Anytime from age 55, 25% of your contracted out fund can be taken as a tax-free lump sum. State pensions do not pay a tax-free lump sum so there is a potential tax advantage in contracting out for this reason.
Another factor that may influence whether you contract out or not is the ability to take your Contracted Out fund anytime from age 55 whereas the State pension will not be available until 65.
Although investment returns from pension funds in the past, over the longer term, have predominantly out stripped inflation, it is extremely important to remember that this does not guarantee it will always be the case. National Insurance rebates are age related and because of the uncertainty of investment returns contracting out of S2P should not be regarded as a one off decision consequently you should review your position regularly.
With reference to the enclosed Contracting Out illustration the investment return required to match the S2P pension given up for the current tax year 2006/07 and subsequent tax years, is an annualised growth rate of approximately 2% pa above the increase in earnings inflation.
Therefore to summarise, based on:
? your age and attitude to investment risk
? the range of investment funds available
? the expectation that inflation will remain low for the foreseeable future
? the ability to take the pension at 55 rather than 65 at which time you can take 25% of the Protected Rights fund as a tax free cash sum
? increased control/flexibility
You might like to consider the option to contract out of S2P.
If you are unsure what to do or if you are not prepared to take the risk (because you could end up with less pension than you might be entitled to under the S2P) you should stay contracted in/contract back into the S2P if you have not already done so.
Get some financial advice if still not sure x