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   Contracting out    CIMPS    Contributions
   Contributory scheme    COMPS    Critical yield
   Court order        

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Contracted in money purchase scheme
A contracted in money purchase scheme (CIMPS) is a defined contribution approved occupational pension scheme.

Since 6 April 2006, Pension Simplification has established the Annual Allowance for contributions at £215,000 for 2006 rising to £255,000 in 2010 and a Lifetime Allowance for the size of an individual's fund from £1.5 million in 2006 rising to £1.8 million in 2010. For members of a defined benefit scheme the value of the allowance is calculated as the increase in value of the employees' pension benefits accrued during the year using a valuation factor of 10:1. This is different for the tax free cash where the scheme must calculate the value of the pension using a 20:1 value for converting a defined benefit scheme to cash. The maximum pension income at retirement age is 2/3rds of final pensionable earnings.

Previous to A-Day the Inland Revenue personal contributions limit to CIMPS was 15.0% of the scheme members relevant earnings and the maximum commutation to a tax free lump sum was two-and-a-quarter times the pension income at retirement age or 3/80ths for each year of service times final remuneration up to a maximum of one-and-a-half times final remuneration.

It is possible that a scheme member of a CIMPS that makes contributions significantly below the HM Revenue & Customs maximums will be able at retirement age to commute the whole of the pension fund value to a tax free lump sum. A CIMPS scheme must be audited each year to comply with the Occupational Pensions Regulatory Authority (OPRA) regulations and there must be an employers contribution to the scheme, although not an employee contribution.

Contracted out money purchase
If an employee contracts out of the State Earnings Related Pension Scheme (SERPS) the employer will be able to fund a contracted out money purchase scheme (COMPS) with the National Insurance (NI) rebates. COMPS will provide a pension to the member that is based on the performance of the underlying investments.

Contracting out
Instead of paying into the State Earnings Related Pension Scheme (SERPS) employees can join a contracted out occupational pension scheme (if the employer operates one) or take out an appropriate personal pension. A contracted out occupational pension scheme will provide a pension income at retirement related to earnings if operated as a final salary pension, or a pension income related to the member's fund value if operated as a contracted out money purchase scheme (COMPS).

The member and employer will pay lower National Insurance (NI) contributions than if they had not contracted out. An appropriate personal pension will provide a pension income at retirement linked to the member's fund value, this being the sum of the contributions made and investment return. An employee contracting out by way of an appropriate personal pension will pay NI contributions in full. SERPS provides no opportunity to the scheme member for commutation to a tax free lump sum at retirement age.

A pension scheme member will be expected to make contributions to qualify for retirement benefits within an employers pension scheme, if it is a contributory scheme and this will usually be stated as a percentage of the scheme members pensionable earnings. Since Pension Simplification from 6 April 2006 the HM Revenue & Customs limits total contributions to the Annual Allowance of £245,000 for the 2009/10 tax year. However, tax relief on the contributions is limited to the higher of 100% of relevant earnings or where tax relief is given at source, limited to £3,600 such as contributions made to stakeholder pensions.

Occasionally it may be a non contributory scheme where the members retirement benefits can be accumulated without making any personal payments. Retirement benefits from a private pension scheme such as a personal pension or stakeholder pensions will be dependent on the members personal contributions made up to their chosen retirement age. At retirement the pension fund can be used to purchase an annuity and the individual has the option to search for the highest annuity rates using an open market option. Learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.

Previous to A-Day the contributions to a personal pension or self invested personal pensions (SIPPs) were dependent on the members net relevant earnings (NRE), limited by Inland Revenue maximums based on the members age and ranging from 17.5% for individuals aged 35 or less up to 40.0% for individuals aged 61 or above, being scaled between these limits. The maximums imposed by the Inland Revenue at that time were in part due to the tax rebates given for contributions made to exempt approved scheme resulting in gross and net contributions.

For a basic rate taxpayer there will be a tax rebate of currently 20.0% for the 2008/09 tax year on contributions made. For a higher rate taxpayer a tax rebate of currently 40.0% is given although for a personal pension part of this must be claimed through their self assessment.

Contributory scheme
Any pension scheme, whether an employers pension scheme or private pension scheme, where the member is required to contribute is known as a contributory scheme.

For an employers pension scheme, such as a final salary scheme the employer will make a contribution to the scheme if required by the scheme trustees to comply with the minimum funding requirement (MFR). The employer may be required not to make a contribution to the scheme if it is in surplus but this will not affect the members pension rights at retirement age.

In extreme circumstances even the members may not be required to make payments until the scheme is in balance, creating a non contributory scheme for a period of time. A private pension scheme will always be contributory as the onus is on the member to make payments if he or she wishes to accrue a sufficient fund value to deliver their desired retirement benefits. At retirement the pension fund can be used to buy pension annuities and the individual has the option to search for the highest annuity rates using an open market option, however, learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.

Court order
In a marriage where one of the partners has applied successfully for a decree of judicial separation, decree of nullity or a decree nisi in divorce proceedings, they can apply for a court order to settle any disputes over children, matrimonial assets or financial matters.

In terms of court orders against the members pension rights from the pension arrangements of a partner, an earmarking order can be applied in nullity, judicial separation or divorce. A pension sharing order can only be applied in divorce and nullity and only after the court has granted a decree nisi. However, if a pension sharing order has been granted prior to the decree absolute it can be subject to a variation of settlement order that will prevent the order from taking place.

Critical yield
The critical yield is used to determine investment returns needed to provide pension income in relation to executive pension plans (EPP), final salary pensions, small self administered schemes (SSAS), pension fund withdrawal (PFW) and transfer value analysis system (TVAS).

For example, with reference to PFW the Financial Services Authority (FSA) has identified two bases for the calculation of a critical yield as;

The growth rate needed on a pension drawdown investment sufficient to provide and maintain an income equal to that obtainable under an equivalent compulsory purchase annuity;
The growth rates necessary to provide and maintain a selected level of income.
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