Abolition of contracting-out for defined contribution pension schemes from 2012 now in lawThursday, May 19th, 2011
Contracting-out for money purchase pension schemes will end in April 2012. What are the payroll implications?
The decision of the previous government to abolish contracting-out for defined contribution pension schemes was included in the Pension Act 2007 and the effective date of 6 April 2012 has now been brought into force by a Commencement Order. Another Commencement Order brings into effect from the same date related provisions of the Pensions Act 2008 which remove restrictions that apply to the protected rights of pension scheme members affected by the change.
Other Regulations have also been made which remove or amend, as appropriate, all references to “contracted-out money purchase schemes”, “appropriate personal pension schemes” and “protected rights” in existing legislation, and which also introduce a number of transitional provisions.
In summary, the changes and their timetable are as follows.
Defined contribution (DC) contracting-out, as it relates to occupational money purchase pension schemes and appropriate personal pension schemes are abolished from 6 April 2012. Contracting-out on a defined benefit (DB) basis for occupational salary-related pension schemes is not affected, at least at present. All members of DC schemes will be brought back into the State pension system and begin to accrue entitlement to the State Second Pension.
The payroll implications are that NICs Table Letters F, G and S, and their mariner equivalents H, K and V, will not be used from the start of the 2012/13 tax year. The Table Letters for affected employees will have to change to the not contracted-out equivalents A, B and J, and R, T and Q for mariners.
The statutory restrictions that apply to the “protected rights” of each scheme member, i.e. that part of their fund that derives from the contracted-out rebate, any return on investment, and tax relief on the rebate, are also abolished from 6 April 2012.
A three-year transition period, to 5 April 2015, will allow for
- the payment of the rebates due for the 2011/12 tax year after 6 April 2012
- the payment or recovery of recalculated rebates due to adjustments to individuals’ NICs records in the following three years.
Other changes, which are more specifically related to pension administration, include:
- setting a lower limit below which it is not viable to pay additional rebates as a result of adjustments to individuals’ NICs records
- removing the restriction that prevents members of a contracted-out scheme transferring to a not contracted-out scheme (as DB scheme members would only otherwise be able to transfer to another DB scheme).
HMRC has begun to publish a bi-monthly “Countdown Bulletin” to explain the changes that are to be implemented. Two Bulletins have been issued so far, and can be viewed at the links below. Links to fact sheets for employers and employees are also shown.