Contracted-out Defined Contribution Pension Schemes – Effect on employers and employees of abolition of contracting-out

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From April 2012, all contracted-out “defined contribution” pension schemes will revert to “not contracted-out” schemes and, depending on their level of earnings, employees in such schemes will start to accrue pension benefits under the State Second Pension scheme.

Schemes that are “defined contribution” schemes are Appropriate Personal Pension (APP) schemes, Stakeholder pension schemes and occupational Contracted-Out Money Purchase (COMP) schemes.

This change does not apply to “defined benefits” schemes, i.e. occupational Contracted-Out Salary Related (COSR) schemes. Abolition of contracting-out for these schemes, if it happens at all, is a much longer term objective.

The abolition of contracting-out for “defined contribution” schemes will have the following effects:

• The contracted-out pension rights that employees have accrued up to 5 April 2012 will still have to be used to provide benefits in respect of the period they were contracted-out of the State Second Pension scheme.
• Employees will pay more primary NICs – at the standard rates instead of the lower contracted-out rates.
• NICs contracted-out Table Letters F, G and S, and their mariner equivalents H, K and V, will be used during 2011/12 and then replaced by the standard Table Letters A, B and J, and R, T and Q respectively.
• From 6 April 2012 these contracted-out Table Letters and their related NICs rates may not be used in payroll records.
• HMRC will remove the Scheme Contracted-Out Number (SCON) from the P14 End of Year Summaries.

Further information:

Notes for Payroll Software Developers (June 2010)

Employer fact sheet: abolition of contracting out on a defined contribution basis

This entry was posted on Wednesday, July 7th, 2010 at 13:45 and is filed under Pensions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.