Pension Planning - Contracted Out Salary Schemes

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Pension Planning - Contracted Out Salary Schemes

A contracted-out occupational scheme, is where you are part of a occupational scheme that requires you to be contracted out of the state scheme. Your employer is responsible for ensuring that enough has been paid into the scheme to provide a sufficient pension.

Sometimes you are also required to pay part of the costs, this is known as a contributory scheme. There are different benefits available which are dependent on the amount of time you have been contracted out.

In the case of a salary related scheme:

For Periods up to April 1997

A guaranteed minimum pension (GMP) is built up and payable from state pension age, it is also available to your partner should you die. This guaranteed minimum pension was approximately equivalent to the State pension that you were giving up. However a contracted out scheme could offer benefits far greater than just a guaranteed minimum pension.

For periods from April 1997 onwards

For the scheme to qualify as contracted-out, it must offer most employees with benefits that are at similar, if not better than those specified for a standard 'reference scheme'. For each year of membership in the reference scheme, the pension equals one-eightieth of 90% of earnings between a lower and upper earnings limit along with a widow /widower's pension of half the sum.

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