Contracting OutThe State Earnings Related Pension Scheme (SERPS) and State Second Pension (S2P) included provisions allowing members to contract out. That means that they may take the additional contributions which would have gone to SERPS or S2P and invest them instead into an appropriate Personal Pension Plan or an Employer’s Scheme – which could be a Money Purchase Scheme or a Final Salary Scheme.
The employer and the employee pay lower National
Insurance contributions, but the amount by which their contributions decrease goes instead into the contracted out scheme.
Contracted Out Final Salary Schemes (Cofss)
To contract out via this route, the member has to be a member of an employer’s Final Salary Scheme. The contributions to COFSS built up an entitlement to Guaranteed Minimum Pension (GMP) which was broadly the same as the SERPS entitlement on the same contributions. This was available from 1978 to 1997.
This arrangement continued until 1997. From that date, the scheme must demonstrate that its benefits satisfy a quality comparison, showing that they are at least equal to, or better than, a series of test benefits known as the Notional Reference Scheme (NRS). The NRS provides for benefits roughly equal to S2P. To demonstrate that this is so, the scheme actuary must provide a certificate at least once every three years that the conditions have been met.
Contracted Out Money Purchase Schemes (Comps)
From 1988, employers could contract out of SERPS (and later S2P) through a Money Purchase Scheme. The money saved from reduced National Insurance Contributions (from both employer and employee) must be paid into the scheme. In addition, the Inland Revenue makes a contribution once a year. The amount of this additional contribution depends on the age of the employee, and increases as the employee gets older. This is known as the Age Related Rebate.
These contributions are kept separate from any other contributions,
and they are known as protected rights. Benefits under protected rights may be taken from age 60, and are governed by the normal rules relating to State Pensions. In particular, these protected rights may not be used to provide any lump sum on retirement. They must be used entirely to provide a pension.
Contracted Out Individual Pension Schemes (Coips)
Since 1988 employees who were not contracted out through an employer’s scheme were entitled to contract out through an Appropriate Personal Pension (APP). This is now available as:
- Personal Pension Plan.
- Stakeholder Pension.
- Free Standing Additional Voluntary Contribution.
The principles governing these contributions are similar to those outlined above for COMPS. In particular, the contributions are treated as protected rights. However, the main difference is in the method of contributing. The employer and the employee continue to pay the full National Insurance contributions, and at the end of the year, the Inland Revenue make a rebate to the provider of the APP.
Retirement Annuity Plans
These plans were the precursors of Personal Pension Plans. Since 30 June 1988, new plans are no longer available, but plans taken out are still valid, and governed by the rules governing them when they were taken out.
Contributions And Tax Relief
Contributions were only allowed to people having income from:
- employment,
- self-employment, or
- furnished holiday lettings.
The maximum limits are slightly different from those under Personal Pension Plans, as follows:
Contributions are not subject to the earnings cap, as are Personal Pension Plan contributions.
If there is a difference between the limits under Personal Pension Plans and Retirement Annuity Plans, and the individual pays contributions under both types of plan, then the limit which may be paid into Personal Pension Plans is governed by the following table: