Pension Planning - Contracted Out Money Purchase Schemes

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Contracted Out Money Purchase Schemes

During periods when you belong to a contracted-out occupational scheme, a pension is built through the scheme instead of the pension that you would have had through the state scheme.

In the case of a money purchase scheme, your employer must pay into the scheme an amount equal to the National Insurance rebate that is received as a result of being contracted out.

In a contributory scheme, your employer will require you to hand over some or all, of the rebate. The rebate is invested and must be used to provide 'protected rights' which are:

1. A pension for you This is payable from retirement but not before age 60. The whole fund must be used for pensions, none can be taken as a tax-free lump sum.
2. A widow's or widower's pension This is whatever pension the fund will buy if death occurs before retirement or half your pension in the case of death after retirement.
3. Pension increases once the pension is being paid at least up to inflation or five per cent a year (whichever is lower).

A contracted-out money purchase scheme can provide extra pension and other benefits in addition to protected rights.

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