Concern about private pension provision is growing

Its advice will go out in a letter to 440,000 customers on Monday.

The Prudential says the amount of money the government contributes to those who are opted out is not big enough to offset the potential risks.

This is the first time the Pru has made this recommendation for all its opted-out customers.

In past years, the Pru has focused its advice more narrowly.

Last year it recommended opting back only to men more than 60 years old and women aged over 54.

But now Tom Boardman, the Pru's director of policy development says the firm strongly believed that most people should contract back.

"It is important that individuals are incentivised for the risks being taken by opting out of the State Second pension," he said.

"Our view is that the rebate levels for the 2005/06 and 2006/07 tax years will not provide sufficient incentive for the majority of our customers to remain contracted out."

Second pension problems

The ability of some individuals to opt out of the S2P (then known as SERPS) was introduced by the Conservative government in 1988.

It extended an option which had been available to occupational pension schemes and their members since 1978.

In return for relinquishing any claim to a second - earnings-related - state pension, individuals would be compensated by paying lower National Insurance contributions.

This rebate would be paid directly into their alternative personal pension plans, such as those sold by the Pru.

Different advice

The idea was that people would be better off in the long term if they relied on their own pension savings, based on the return from investments, rather than on some of the benefits provided by the state.

Now, however, the tide of opinion is strongly against contracting out of the S2P.

In August the Financial Services Authority (FSA) said many of the 3 million people who are currently opted out of the S2P were likely be worse off as a result.