Class 1 structural overview: Occupational and Personal Pension Schemes: some basics
The Social Security Act 1986
The Social Security Act 1986 introduced new choices and reforms of pension provisions, resulting in more flexibility for both employer and employee.
The State Retirement Pension
Retirement pension (RP) is made up of two parts:
- A basic pension which is payable to anyone who has paid enough NICs and has reached the state pension age.
- An additional pension (AP) based on earnings from the LEL and up to and including the UEL, known as the State Earning Related Pension Scheme (SERPS) and from 6 April 2003 as the State Second Pension.
Changes from April 2009
The Pensions Act 2007 and the Pensions Act 2008
From 6 April 2009, an Upper Accrual Point (UAP) has been introduced. Up to 5 April 2009, the Additional Pension was based on earnings from the LEL and up to and including the UEL, but from 6 April 2009 is based upon earnings up to the UAP which was introduced at a fixed permanent value of £770 per week.
For non contracted-out contributors, the practical effect of the UAP is that no additional pension entitlement accrues beyond that level of earnings, despite full rate contributions being due on the remaining earnings up to the UEL. For those in contracted-out employment, however, not contracted-out rates of contribution will now apply between the UAP and the UEL
Changes from 6 April 2012
The Pension Reform Programme delivers HMRC changes from the Pensions Acts 2007 and Pensions Act 2008, as well as the Pensions Act (Northern Ireland) 2008. These changes included measures to simplify the administration of occupational and personal pension schemes by abolishing contracting out on a defined contribution basis.
What these changes are
Contracting out of the additional State Pension on a Defined Contribution basis was abolished from 6 April 2012. This means that from 6 April 2012, individuals will automatically be brought back into the State additional pension scheme and will no longer be able to opt into
* Contracted out Money Purchase (COMP) schemes * Sections of contracted out mixed benefit (COMB) schemes contracted out on a DC basis * Appropriate Personal Pension (APP) schemes and APP Stakeholder schemes.
This means that, from the 2012 to 13 tax year, the National Insurance contributions (NICs) category letters F, G, H, K, V, and S will become obsolete and should not be entered onto forms P11 or P14, and Scheme Contracted-Out Numbers (SCONs) will no longer be entered onto the form P14.
Please note that, for tax years after 2012 to 2013, it will still be possible to contract out of the additional State Pension on a Defined Benefit basis (Contracted-out Salary Related (COSR) schemes). However, the appropriate scheme must hold a valid contracting-out certificate to do so.
Graduated retirement benefit (GRB) based on earnings, is payable to anyone who paid into the National Insurance Graduated (NIG) Scheme which ran from 6 April 1961 to 5 April 1975.
Contracted-out Salary Related Schemes (COSR)
Under the Social Security Pension Act 1975, occupational pension schemes could only contract-out of SERPS if they promised the person a pension related to the level of their earnings. These are known as Contracted-out Salary Related (COSR) Schemes.
Contracted-out Money Purchase Schemes (COMP)
From 6 April 1988 to 5 April 2012, occupational pension schemes that promised a minimum level of contributions and minimum payments could also contact-out of SERPS. These were known as Contracted-out Money Purchase (COMP) Schemes. A COMP Scheme provides a pension based on the value of the fund built up in the scheme, i.e. the investment return.
Appropriate Personal Pension Schemes (APP)
From 1 July 1988 to 5 April 2012, employees could start an Appropriate Personal Pension (APP) instead of staying in SERPS. Employees could choose an APP rather than join their employer’s pension scheme. An APP scheme, like a COMP scheme, provided a pension based on the value of the fund built up in the scheme.
Stakeholder pensions are a new type of low cost pension available to people from 6 April 2001 to help boost their income later in life.
Employers could select a stakeholder pension scheme from as early as October 2000 (from those schemes approved and registered), however contributions could not commence until 6 April 2001.
For further information about contracting-out, contact NIC&EO National Insurance Services to the Pensions Industry (formerly Contracted-Out Employment Group).