Contracting Out

Suppose that you are a member of a contributory funded group pension scheme, and that you are contributing 5% of your pay and the employer 10% - a total of 15%.

Bear in mind that both you and your employer are also making contributions towards benefits under the state pension plan, and that these are, in 2001/82, at a combined rate of 17.95% (7.75% + 10.2%). Now, since the government recognises that many people are already in good occupational pension schemes it may be possible for your company pension scheme to be arranged as an alternative to, instead of as an addition to, the state earnings-related scheme. In such a case your employer may have all the employees in his scheme 'contracted out' of the state scheme. In order to be able to do so he must show that his scheme conforms with very stringent conditions, in particular that it guarantees a minimum pension for you that at least matches what you would have got under the state earnings-related scheme, and also some minimum widow's benefits. Most large company group schemes provide benefits far higher than those from the state scheme, and so employees are contracted out. This means that, whereas they will not qualify for the state earnings-related pension, they will pay National Insurance contributions at a significantly lower rate than those quoted on page 17.

Inflation proofing

Even though your company pension may be planned to increase during payment by a stipulated percentage, say 3% or 5% a year, this sort of increase now seems most unlikely to be sufficient for the pension to maintain its spending power if inflation continues at anything like the rate of recent years. There is just no way in which a pension fund can guarantee an inflation-proofed pension, since it is impossible to predict what will be the future rate of inflation. The only organisation that can offer inflation proofing, or index linking as it is sometimes called, is the government itself, for only the government has the power to call upon future taxpayers to provide the necessary funds.

Accordingly, when an employer has contracted you out of the state scheme the government itself will protect against price rises part of your company pension up to the amount of earnings-related state pension you would have received had you not been contracted out.

On Leaving The Employment

All occupational pension schemes must, by law, provide certain minimum rights on leaving the service of the employer. Discussions are taking place during 2015 with a view to making further improvements to these rights.

It used to be possible for a person leaving the service of an employer to be handed back in cash all the contributions he had made to the pension fund. For people now starting work this option is not always possible. The following are the existing alternative rights.

1. The right to a pension, based either on your own contributions to date, or on both your and... see: On Leaving The Employment

Refunds, Personal And Business Finance 2017

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