David Ball
CONTRACT OUT NO LONGER...
18th May 2011
The Pensions Acts 2007 and 2008 introduced legislation to end contracting out of the State Second Pension scheme (S2P), and this legislation will be effective from 6th April 2012. From that date, it will not be possible to contract out via money purchase pension schemes. Final salary schemes will be able to continue contracting out.
Contracted out benefits are recorded separately within pension schemes, and are referred to as ‘protected rights’. Scheme administrators have been required to separately record the value of these rights within schemes, and members had to take benefits from protected rights in a prescribed manner. With effect from 6th April 2012, there will be no need to separately record these rights, and any conditions applying to benefits will be removed so that they are treated in the same way as other benefits.
Money Purchase Pension Schemes
If you are in a money purchase scheme, the scheme administrator will be required to notify HMRC that the member is no longer contracted out, but the Employer will have a three year period in which to apply rebate payments for the 2011/12 tax year, and to ensure that all payments are up to date.
Appropriate Personal Pensions
If you are in a contracted out (known as ‘appropriate’) personal pension plan, the insurance company will be writing to you to confirm that they will contract you back into S2P by 5th April 2012.
State Pensions
A Contracted Out Deduction (COD) will be applied to state pensions in payment to take into account any period during which a member was contracted out of the state scheme and hence paid a lower rate of National Insurance contributions. The recent proposals to introduce a minimum level of state pension for all have also recommended a reduction for those who have protected rights benefits. How this will work in practise is still to be confirmed.
HMRC are producing a series of newsletters relating to the abolition of contracting out for money purchase schemes. The newsletters can be found at the following location:
