Quick guide to contracting out of State Second Pension
Some of you have been asking me about this so here’s a quick summary of the changes. Firstly, a quick recap on what we’re talking about:
Contracting out was where a person opted out of the State second pension (used to be known as SERPS until 2002) and hoped to obtain greater benefits when they retired by having National Insurance rebates paid into their own pension scheme arrangements.
Members of a pension scheme could opt out of the state second pension and get a rebate of their National Insurance contributions (if they were members of a Defined Contribution* Scheme) paid by HMRC into their pension pot. Members of Defined Benefit* schemes pay less National Insurance and are relying on their pension scheme to make up for the fact that they aren’t accumulating state second pension benefits.
For anyone who is a member of a defined contribution pension and currently contracted out, you will be contracted back in. The government have removed the choice and you will pay National Insurance contributions at the normal rate and accrue state second pension benefits.
Defined benefit scheme members can remain as they were and do not have to opt back in to state second pension.
Those of you who have been contracted out will have built up a Protected Rights fund from your contracted out National Insurance rebates – this will remain invested in your pension pot.
State second pension benefits vary according to what you earn but it is capped at a maximum of £159.52 for the 2011/12 tax year. A new state pension with a single flat rate of benefit has been proposed but has not come into effect just yet.
*Defined Benefit – a scheme which defines what you will receive in retirement. Defined Contribution – a scheme where you know what you pay into the scheme but you do not know for sure what your future benefits will be.
If you need any further clarification please get in touch with me: david@gibsonfp.com or 02870351164
By David Gibson
