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Financial planningFor individuals

Abolition of contracting out on a defined contribution basis

By December 6, 2011February 12th, 2019No Comments

Do these changes affect you and your pension savings arrangements? From the 6th April 2012 individuals will no longer be able to contract out of the additional State Pension (also known as the State Second Pension) on a defined contribution (money purchase) basis. Instead individuals will automatically be brought back into the additional State Pension and begin to build up entitlements from this time.

At the moment some pension schemes are set up to provide a pension which replaces all, or part, of the additional State Pension. This includes some company, stakeholder and personal pension schemes. When an individual joins one of these pension schemes, they are said to be ‘contracted out’ of the additional State Pension.

The National Insurance rebates an individual currently gets if they are contracted out are intended to provide benefits broadly the same as those given up in the additional State Pension. However, because benefits from defined contribution schemes can vary, it is very difficult to predict with any degree of certainty what they will get. Due to this uncertainty and the difficult judgements that individuals currently have to make about whether they would be better off in the additional State Pension or contracted-out, the Government has decided to abolish contracting our on a defined contribution basis.

From 6 April 2012, instead of receiving rebates of National Insurance contributions, individuals will begin to build up an entitlement to the additional State Pension. For every year that they pay National Insurance on earnings over £4,940 a year (based on 2009/10 earnings), they’ll get an extra £1.60 a week on their State Pension when they come to claim it.

An individual will still be able to save in a defined contribution company pension, personal pension or stakeholder pension. All this change will do is remove the option for individuals to use this type of pension arrangement to contract out of (leave) the additional State Pension. An individual’s pension scheme administrator or employer should contact them nearer the date of abolition in order to explain how their scheme will operate in future.

If you want to find out more about how this might affect your pension savings arrangements, contact one of the team who will be happy to help.