Abolition of contracting-out on a defined contribution basis

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HMRC gives further information on the impact of abolition from April 2012.

From April 2012, all contracted-out “defined contribution” (DC) pension schemes will revert to “not contracted-out” schemes and, depending on their earnings levels, 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, Contracted-Out Money Purchase (COMP) schemes, and the money purchase sections of Contracted-out Mixed Benefit (COMB) schemes.

In preparation for the change, HMRC has been publishing a series of “countdown bulletins”, the latest issue of which includes the following information:

Contracting-out from 6 April 2012

At 6 April 2012, all contracting-out certificates held by DC schemes will be cancelled automatically, including certificates issued in respect of the money purchase sections of COMB schemes.  Only salary-related schemes that are contracted-out on a Defined Benefit (DB) basis will be able to contract out after 5 April 2012.

Salary-related sections of existing COMB schemes will be able to continue to contract-out using their existing contracting-out certificate.  These certificates will remain valid and will not be replaced.

If a scheme is currently contracted-out on a DC basis only but is able to meet the requirements for contracting-out on a DB basis at the abolition date, it will be permitted to switch from DC to DB contracting-out.  From 6 April 2012 this can be done without the scheme having to discharge its liability for what were protected rights.  However, as the DC contracting-out certificate will be invalid, the scheme will need to make a new election to contract-out on a DB basis. To do this the   procedures outlined in booklet CA14C should be followed.

One-off closure scan

Following the abolition of contracting-out on a DC basis in April 2012, HMRC plans to perform a one-off “closure” scan in early 2013.  The scan will automatically close any open APP/APPSHP and COMP/COMPSHP scheme memberships, using a termination date no later than 5 April 2012. This process will not produce any electronic or paper acknowledgements to either the scheme or the customer.

• APP/APPSHP schemes – in all cases where an open entry is found on a member’s record, the termination date of 5 April 2012 will be applied.
• COMP/COMPSHP schemes – the scan will close all open periods with the end date of the last tax year in which HMRC received contracted-out contributions for that scheme.  For example, if the final year for contracted-out contributions was the 2010/11 tax year, the end date will be set to 5 April 2011.

Further information:

Countdown Bulletin – Abolition of contracting-out for defined contribution schemes 

Tags: abolition, contracting out, Recent Payroll News

This entry was posted on Monday, September 12th, 2011 at 16:16 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.