11 March 2005 - New contracting out regulations to be consulted on
New regulations that would allow contracted-out benefits to be paid as part of a cash lump sum are to be put out to consultation announced Pensions Minister, Malcolm Wicks.
This is one of a series of proposed changes to the contracted-out pension schemes regulations that will make the benefits in pension schemes which have opted out of the Additional State pension easier to administer and understand.
Announcing the changes, Pensions Minister Malcolm Wicks said:
“The changes we want to make will help simplify an area of pensions legislation that by common consent is too complicated.
“They remove some of the restrictions on when and how contracted-out benefits can be paid. The regulations will provide pension scheme members with a greater degree of flexibility at retirement and will also make it easier to understand their benefit entitlement.
“It will be good news to pension providers and those administering contracted-out pension schemes.“
The key changes will be to allow contracted-out rights in money purchase schemes to be paid as part of a tax-free cash lump sum on retirement and to increase the limit below which small pensions can be paid as a cash lump sum.
Combined with the provisions in the Pensions Act 2004 these changes introduce significant simplifications to when and how benefits in contracted-out pension schemes can be paid.
The consultation period will run until 5th May 2005.
Notes for editors
- Since 1978 employers have been able to opt out their employees from the Additional State pension if alternative occupational provision, which meets specified requirements, is made. This process is known as Contracting Out. This provision was extended to personal pensions in 1988. To make up for the State Pension given up, those individuals who do decide to contract out pay a reduced rate of National Insurance contributions. This reduction is known as the ‘contracted-out rebate’ and is intended to provide benefits which represent those given up in the State scheme.
- The changes contained in this package of regulations will remove some of the restrictions attached to contracted out benefits and introduce other easements to the administration of contracted-out benefits. For example, the changes include:
- allowing protected rights to be commuted as part of a 25% tax-free lump sum on retirement;
- increasing the trivial commutation limit below which small pensions can be paid as a lump sum to 1% of the Inland Revenue’s Lifetime Allowance in line with provisions in the Finance Act 2004; and
- allowing serious ill health commutation of all contracted-out rights in all schemes, with the exception of any entitlement to a survivor's pension.
- The consultation document can be accessed on line at http://www.dwp.gov.uk/consultations/2005/index.asp
- The Department is aiming to make and lay the regulations relating to contracting out in June 2005, to come into force on 6 April 2006.
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