Growing at 3% a year over inflation and after annual charges of 1% of the fund value, this rebate would grow to £7,970 by age 65. This would buy an index-linked pension of around £490 a year (with a 50% spouse's pension of £245 a year if the planholder dies). The corresponding S2P pension given up would be £338 a year. So, given the circumstances in this illustration, this worker would be better off contracting out.

Predictably, it's very hard to decide conclusively whether an individual should remain in S2P or contract out. Essentially, your decision is governed by three main factors:

1. Your age. The younger you are, the longer your invested rebates have to grow and, therefore, the greater their potential for growth. Roughly speaking, once you're over 45, contracting out becomes increasingly less attractive.
2. Your salary. The more you earn, the more attractive it becomes to contract out. Conversely, low-paid workers will usually benefit from remaining in SERPS or S2P. One general rule is that people earning less than £10,800 should never opt out, regardless of their age.
3. Future investment returns. Over periods of twenty years or more, investing in shares is likely to produce superior returns than putting your money in cash or bonds. Hence, if you're not comfortable with stock-market risk, contracting-out probably isn't for you.

In practice, what this means is that your decision to contract out needs to be reviewed every few years. For ultra-cautious folk, this could mean annually. It's important to note that if you've contracted out of SERPS and never contracted back in, you won't be in S2P.

Note that signing a single form back in the Eighties or Nineties could mean that you're still contracted out today - even if it's not in your interests to be so!

Unfortunately, for millions of people, contracting out has been an expensive mistake, because they will end up with lower pensions than if they'd stuck with SERPS and S2P. In part, this is due to actual investment returns being lower than previous projections, which were far too optimistic. Also, old-style personal pensions carry a bewildering array of charges, which decrease investors' returns and, in some cases, mean no growth over fifteen years or more!

So, if you're a fairly young, above-average earner and a great believer in the stock market for long-term investing, contracting out may be right up your street. However, if you're over fifty, on a modest wage and wary of investing in shares, contracting in is certainly your best option. For everyone else in between, the calculation is fiendishly difficult!

The decision to contract out has become so difficult that it has led a few pension companies to refuse to accept contracted-out rebates. Sadly, there is also a growing number of cases of mis-selling, where workers have been encouraged to opt out of SERPS/S2P, despite it not being in their best interest to do so. As with other mis-selling scandals, the root cause is the desire of financial salespeople to earn commissions on these sales, regardless of the quality of their advice!

If you do decide to contract out, make sure that you shop around for a Stakeholder pension provider with low charges. Old-style personal pension plans levied extortionate charges, which made contracting out far less attractive. Thus, if you have directed - or continue to pay - rebates into any old-style pension plans, it may be in your interest to switch these to a low-charging modern plan.

Note that if you're a member of an occupational pension scheme (one run by your employer), the entire scheme has to be contracted in or contracted out. It's a bit doing like the 'Hokey Cokey' - you put your whole workforce in, or you contract all of them out! However, you can make an individual decision to contract out even if you're a member of a company scheme, but it's down to you to make the arrangements yourself.