Your Pension Options

Leaving The Additional State Pension

You cannot leave the basic State Pension but, in some circumstances, you can choose to leave the State Second Pension and join a private scheme of some kind instead. This is called ‘contracting out ‘.

If you choose to join an occupational pension scheme run by your employer, contracting out means that you and your employer pay lower National Insurance contributions. When you retire, your second pension will come from your employer ‘s scheme and not from the State Second Pension.

You can also contract out of the State Second Pension to join a stakeholder pension scheme or a personal pension scheme. Instead of paying lower National Insurance contributions, once a year the Inland Revenue will pay directly into your personal pension account an amount that is equal to what you would have paid towards your State Second Pension. This is called the contracted-out rebate. You can join a stakeholder pension scheme or a personal pension scheme without contracting out of the State Second Pension but, if you do this, you won ‘t get the rebate.

You will usually get tax relief on your contributions to a private pension scheme. With a basic rate of income tax of 22 per cent, every £100 that goes into your pension costs you £78 (based on the tax year 2002/03). If you pay income tax at the higher rate of 40 per cent, every £100 that goes into your pension fund costs you £60 (based on the tax year 2002/03).

Some occupational schemes and some personal pensions are organised on a ‘rebate-only’ basis. This means that the only money being paid into the scheme is your National Insurance contributions rebate. If you have chosen this sort of second pension, it will give you roughly the same pension you would get from the State Second Pension. You may still need to think about whether this will be enough to support the lifestyle you want when you retire.

From 6 April 2002, a member of a contracted-out occupational pension scheme earning £24,600 or less (in 2002/03 terms) in a tax year will get a State Second Pension top-up for that year. A person contributing to a contracted-out pension earning less than £10,800 (in 2002/03 terms) in a tax year will also get a State Second Pension top-up for that year. The top-up reflects the more generous additional pension provided by State Second Pension.

If you are not sure what is the best choice for you, you may want to get further help.

1 2 3 4 5 6 7 8 9 10 11 12 13

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>