in money purchase scheme
A contracted in money purchase scheme (CIMPS) is a defined
contribution approved occupational
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
regulations and there must be an employers contribution to
the scheme, although not an employee contribution.
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.
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
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
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
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
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.
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.
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.