What is the relationship between contracted out discounts and the utilisation of drawdown annuities?
It is possible to contract out of the added state pension by using a private allowance plan that is authorized to accept NIC rebates, called an appropriate personal allowance plan (APPP). To be accepted to contract out, the individual must be employed and pay the full rate of State Insurance Contributions.
If an employee contracts out through an APPP, some of their NICs are redirected to the APPP in the shape of repayments. The rebates are age related; the older a worker, the bigger the discount will be.
From April 2012 it will not be possible for an individual to contract out of S2P, and the level of kickbacks is now such that advising a client to contract out is unlikely to represent acceptable information. Bearing that in mind, the remainder of this section explains the basis on which clients who have contracted out during the past will have built up benefits.
Nonetheless since A Day it's now possible to use previous protected rights monies (i.e. Funds that have accrued from contracted out rebates) with a drawdown plan. Therefore when you're looking for the solution to the query does pension drawdown work with protected rights funds well post 06 April 2006, the answer is now yes!
How does it work in practice? Both worker and employer continue to pay the full rate of contracted-in NICs. At the end of the tax year, the Department for Work and Pensions (DWP) will work out the remission and pay it to the APPP. There's normally a time lag on payments, with invoice around September after the end of the tax year. The APPP fund that these rebates are paid into is sometimes known as a protected rights fund.
Rebates are not available retrospectively but can be requested over the course of a tax year. Once established, contracting out by this route remains in place , unless requests are made to stop the process.
The refund and motivations are payable above and beyond any contributions to an individual or stakeholder annuity. NIC payments are reviewed on a five-yearly basis.
In reality, a confidant today would focus more on whether it is applicable for a client to contract back in to S2P now, instead of waiting for compulsory re-entitlement in 2012.
About the Author:
Early Pension and Early Retirement are key issues looked at by My UK Pension Plan, an online service which connects individuals with Financial Advisers
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