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Contracting Out Of The State Second Pension

Contracting Out

 

Contracting Out means you continue to pay standard National Insurance contributions, but the National Insurance Contributions Office will pay a National Insurance “rebate“ directly into your own pension plan. This is instead of additional state pension benefits provided by the State Second Pension. The fund you build up in your pension fund is known as the “Protected Rights Fund“.

 

Can I Contract Out Of The State Second Pension?

 

·         If you are employed, you can contract out of the State Second Pension in much the same way as you could under SERPS

·         When you contract out you give up the right to future retirement benefits under State Second Pension for the tax years you are contracted out.

·         You may contract out via a personal pension or a stakeholder pension, but not at the same time as you are contracted out through an occupational pension scheme.

 

Important Update: From the 6th April 2012 you will no longer be able to contract out of the State Second Pension. 

 

What benefits will I get when I retire?

 

Your Protected Rights fund is used to provide you with an income for life when you retire. You may take your benefits at any time from age 50 (55 from 6th April 2010). You can take up to a quarter of your fund as tax free lump sum. If you want to take tax free cash you must do so before the age of 75. You can buy a pension after age 75, but after this age, lump sums to you or your dependents won’t be allowed.

 

The pension you buy will normally be payable each month during your lifetime and you may need to pay tax on it. How much tax you pay will depend on your total income at the time. You may also select a guarantee that your pension will continue to be paid for a minimum period (not exceeding 5 years), even if you die during that time.

 

You must provide a pension for your spouse of 50% of your own pension. This will be payable on your death after the end of any guaranteed period you selected when you retired. The pension will increase each year on the same basis as your own pension.

 

If you are not married or in a civil partnership when you retire, you do not need to buy a spouses pension. You may use all of the fund to buy a pension for yourself. However, if you marry or enter a civil partnership after you retire, a pension will not be paid to your spouse if you die before them.

 

What happens if I die before I retire?

 

If you die before you retire, your Protected Rights fund must be used to buy a pension for your spouse. If you are not married or in a civil partnership at that time, a lump sum will be paid.

 

If you die aged 75 or over and before you start taking your pension, its only possible for your spouse to recieve a pension, cash sums are not allowed.

 

This information is based on MJD Financial Services Ltd understanding of HM Revenue & Customs practice, which may change from time to time.