Abacus Advice Limited
Borough Green
Sevenoaks
Kent
TN15 8ER
Address
3 Station RoadBorough Green
Sevenoaks
Kent
TN15 8ER
Telephone Number
01732 881188Fax Number
01732 881213Email Address
mhardy@aaltd.co.uk
Contracting out
(For information puposes only).
The following is not advice and should not be relied upon. Talk to your financial adviser before taking any action.
Your questions answered
Q:What is the State Second Pension?
A:Nearly everyone can expect to get a basic State Pension when they reach State pension age. You will also qualify for the State Second Pension, providing you have not contracted out, if you're an employee and earning above a certain level on which you have paid 'A rate' National Insurance contributions. Until April 2002, the State Second Pension was called the State Earnings Related Pension Scheme (SERPS).
Q:Didn't the Chancellor announce further changes to the State Second Pension this October?
A:The Chancellor announced that the introduction of a fixed upper level (as opposed to one which increases every year) of earnings on which State Second Pension benefits build up would be in 2009 rather than the originally intended 2012. This will only affect people earning more than £34,840 a year in 2007 terms. The measure will affect both rebates and State Second Pension benefits equally and so it has no bearing on your contracting out decision.
Q:What do contracting in and contracting out mean?
A:The amount of State Second Pension you will receive will depend on your earnings in each tax year. You pay for the State Second Pension through your National Insurance contributions: your employer also pays through their National Insurance contributions.
Every tax year you have a choice to make. You can choose to build up some State Second Pension (payable from State pension age - see below) - this is called contracting IN. Alternatively, you can choose to give up your right to this State Second Pension in return for a payment from the Government into your own personal pension plan. This is called contracting OUT.
If you choose to contract out then the Government payment goes directly from the National Insurance Contributions Office into your personal pension plan - it does not come back to you for you to pass on. This payment is made up of some of the National Insurance contributions made by yourself, and your employer, together with an element of income tax relief.
Q:At what age will I receive my State Pension?
A:State pension age is changing.
Today, the State Pension becomes payable when men reach age 65 and women reach age 60
An increase in State pension age for women is being phased in between 2010 and 2020, so that by 2020 all women will have to wait until age 65 to receive their State Pension
Further increases for both sexes are being phased in between 2024 and 2046, so that by 2046 everyone will have to wait until age 68 to receive their State Pension
Q:What is a personal pension?
A:A personal pension is a pension policy you take out yourself from an insurance company or financial institution into which you may pay contributions. The pension it will provide depends upon various factors including investment performance, charges and annuity rates at retirement.
Q:How do I know if I'm contracted out?
A:Our records indicate that you are currently contracted out. If you would like to confirm this, you can contact the National Insurance Contributions Office on 0845 915 0150. They will ask for your National Insurance number, which can be found on your payslip from your employer.
Q:What happens if I die?
A:If you are contracted in, your spouse or civil partner will be eligible for a portion of your State Second Pension. If you are contracted out, your personal pension will also provide for your spouse or civil partner, if one survives you, otherwise any remaining money may be payable to your estate as a lump sum.
How do I decide what to do?
Q:What factors should I take into account in my decision?
A:You should consider your attitude to investment risk and whether it is more important to you to maximize your pension or to have the flexibility of taking early retirement and tax-free cash.
Q:What are the main differences between contracting in and contracting out?
A:This table sets out the key differences.
If you contract back in:
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You will only be able to receive your State Second Pension benefits when you reach State pension age, which is currently 65 for men and 60 for women. Legislation has already been passed to increase State pension age for both men and women as set out on the front page.
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You will be eligible for State Second Pension benefits in respect of the National Insurance contributions you made for the 2007/2008 tax year and any subsequent years that you are contracted in to the State Second Pension. However, the value of the pension you'll receive will depend upon the benefits available at your State pension age.
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You are only able to contract back in for the current tax year on-wards. Payments into your personal pension plan while you were contracted out will remain in your personal pension.
If you remain contracted out:
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Your contracted out personal pension can begin at any time you choose after you have reached age 55.
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You can normally take up to 25% of the fund value of your personal pension as a tax-free lump sum at your chosen retirement date.
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However, retiring early or taking a tax-free lump sum will reduce the amount of pension you will get.
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The value of your.pension fund will depend upon-the value of the units in the funds you have chosen and could be more or less than the contributions you have made.
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The level of pension you are paid at retirement may be more or less than you could have received if you had remained contracted in to S2P.
Q:Is there a specific age when it's best to contract back in?
A:The Government Actuary calculates the amount that would need to be paid into your Personal Pension in order to replace the State Pension given up by people who contract out. These amounts increase with age, as pensions cost more to provide for older people. However, from this year, the Government has decided to override the advice of their Actuary and limit the payments for people aged 44 and over to save costs.
Q:What does tax-free cash (TFC) mean?
A:You can normally take up to 25% of your fund when you take your benefits. Most customers will not have to pay tax on this amount.
Q:How much will my pension be if I remain contracted out?
A:It's impossible to tell this, as the final amount is dependent on investment returns and the cost of the annuity at retirement.
Q:What happens to my existing pension if I contract back in?
A: If you contract back into the State Second Pension, Government contributions currently going in to your receiving pension will stop. Any money already in your pension will remain invested with your pension provider until you decide to take your retirement benefits, and its value could go down as well as up. You will retain the options to take up to 25% of your receiving pension fund in cash and to take your benefits any time after you reach age 55. If you or your employer currently makes regular contributions to your receiving pension, your pension provider will continue to collect them.
What do I do next?
Q:What happens next?
A:If you have decided to remain contracted out, you need do nothing. If you have decided to contract back in, please ring us on 01732 881188 and may tell you what to do.
Q:I want to contract back in previous years' contributions. How do I do this?
A:Based on current law, you cannot do this. You can only make the decision to contract back in for this and future tax years. The money you have previously contracted out will remain invested within your personal pension to provide a pension at retirement.
Further information
Q:Where can I find out more information?
A:The Financial Services Authority and the Government's Department for Work and Pensions publish consumer guides and independent reports on contracting-out, which can be found on their websites.
For the FSA website: http://www.moneymadeclear.fsa.gov.uk/pdfs/contracting_out.pdf
For the DWP website: www.thepensionservice.gov.uk
Click on: I'm planning ahead / Understanding your pension options / Additional State Pension / Contracting out
Q:Who should I speak to, to get some advice?
A:We hope that the information we've given you will enable you to make a decision, however, if you are still unsure you should speak to your financial adviser.
Published November 2007
Authorised and Regulated by the Financial Services Authority FSA No.402725
Registered Address: 3 Station Road Borough Green Sevenoaks Kent TN15 8ER.
Registered in England. Registration No.3694074
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