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Commercial Angles' Newsletter - April 2002

Stakeholder pension schemes and contracting-out

The Inland Revenue published Update 119 with the above heading in February 2002. At a stroke the simple world of stakeholder pensions became more complex. And the actions taken today may cause other headaches in the future.

Authorised pension providers have been able to apply to establish stakeholder pension schemes since October 2000. Since October 2001 all employers with five employees or more, each earning sufficient to pay National Insurance Contributions, have been required to provide stakeholder pension schemes or suitable alternatives for their employees.

The existing guidance notes in IR76 (2000) parts 13 and 22 indicate that stakeholder pension schemes may, but do not have to, enable their members to contract out of the State Earnings Related Pension Scheme (SERPS). However recent advice from the Department of Work and Pensions is that under Section 1 (8) of the Welfare Reform and Pensions Act 1999, stakeholder pension schemes must accept transfer payments of pension rights from other schemes. These rights may include contracted-out rights and to accept these payments the accepting scheme must hold a contracting-out certificate.

Therefore all stakeholder pension schemes must apply for a contracting-out certificate at the time of applying for tax approval and stakeholder registration. Arrangements have been made to allow existing registered stakeholder schemes which do not hold contracting-out certificates to comply with this requirement.

The practical implications are that members of approved pensions providers' stakeholder pension schemes will be able to choose whether or not they wish to contract out of SERPS. This in turn has implications for the payroll calculations of National Insurance Contributions payable. Wages clerks may now have to wrestle with more than one set of deductions tables or else use payroll software. The lowest cost payroll solutions such as QuickBooks Payroll will often be adequate for businesses employing less than fifty employees.

Other implications affect Self Invested Personal Pension Schemes (SIPPS). SIPPS are not able to contract-out and are not therefore acceptable now as stakeholder pension schemes.

Contracted-out Money Purchase Schemes (COMPS) which are also stakeholder schemes will probably not be affected by the change as, by definition, the schemes are contracted-out of SERPS. However new COMPS will have to restrict membership to the categories of employees on the contracting-out certificate in order to obtain approval from IR SPSS and Opra.

Inland Revenue is currently revising the guidance notes IR76 (2000) and a further update will be issued when the amendment is published.

Articles from previous newsletters