Contracted Out Money Purchase Schemes (COMPS)

A money purchase occupational pension scheme may be used to contract out. The decision to contract out is made by the employer, not the employee.

If the scheme is contracted in, the member can still choose to contract out via an Appropriate Pension Plan (APP).

Contracting out rebates

Under a COMPS, both the employees' and the employer's NICs are reduced. Two types of National Insurance Contribution (NIC) rebate are then paid into the scheme, as follows:

the employer is responsible for ensuring that at least the flat rate rebate is paid into the scheme,
the flat rate rebate reflects the NIC reduction of both the employee and the employer,
the employer may then recoup the employee's share of the rebate from their earnings; and
an additional age related rebate is paid directly into the scheme by NICO following the end of the tax year,

The rebates are paid into the COMPS, but form a separate protected rights fund.

Contracted out benefits in payment

The rules that apply to the payment of the protected rights benefits are the same as those that apply to the payment of protected rights benefits under an APP:

up to 25% of the protected rights fund may be taken as a tax-free cash lump sum and the balance must be used to provide an income;
the pension can now be paid from the age of 50 (increasing to 55 from 2010), or upon earlier death;
the protected rights fund is converted into pension using unisex rates and if benefits commence on or after 6 April 2005 there is no longer any requirement for protected rights benefits to escalate in payment, but if the benefits commenced before this date they must continue to escalate in payment at prescribed rates;
if the member is married or has a civil partner when an annuity is purchased, a 50% spouse's pension must he included;
if the member is single when an annuity is purchased, they may purchase a single life annuity;
the entire protected rights fund must be used to purchase a spouse's/civil partner's pension on death before retirement; and
if the member has no spouse or civil partner on death before retirement, the fund can be paid as a lump sum at the trustees' discretion.

The State Second Pension (S2P) provides enhanced benefits to those on low levels of earnings. The rebates paid into a COMPS do nut include this enhancement and therefore a member of a COMPS may receive a S2P top-up paid by the State.

For more information, please contact us.