S2p

noodles

does anyone know much about state 2nd pension.
If you have a director earning above the LEL who therefore qualifies for state pension, do they also qualify for S2P, how does S2P work as I have a director asking me this question as he says he has contracted out - help!!

Rozzi Rainbow

I don't know a lot about S2P, I looked into possibly contracting out myself but then decided against it as it seems to be stopping at some point soon (for personal pension schemes). Here is the info I was looking at on the HMRC website, I think it should also answer your questions:

http://www.hmrc.gov.uk/ni/reducedrate/contractedout.htm

"If you're an employee you'll be entitled to receive the State Second Pension if you pay full-rate National Insurance contributions. If your earnings are between the 'lower earnings limit' (£102 a week for 2011-12 tax year) and the 'primary threshold' (£139 a week for 2011-12 tax year) they'll normally count towards the State Second Pension even if you don't pay any contributions."

So it seems as if normally he would qualify for S2P, however "If you contract out of the State Second Pension you'll lose some or all of your entitlement to it. Instead you will receive your pension from your pension scheme."

I believe you need to use a different NI code for contracted out employees as they pay reduced rate NICs (if they have an occupational pension but not for a stakeholder or private pension). Here is another link that expalins the S2P in more detail:

http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/AdditionalStatePension/DG_4017827

payrollpro

Hi,

As explained, S2P is the new top up pension to the basic retirement allowance and replaced SERPS in 2002. The decision to contract out and rely purely on the basic allowance of around £100 a week plus whatever private pension your client is buidling up is a very involved one and should only be made in conjunction with advice from an independent adviser, an FSA qualified and insured adviser.

You are right that someone who contracts out of the S2P pays a lower amount of NIC's but that's not always obvious. If it is a personal pension arrangement then you as payroll provider, or within the SA return will always assume the standard rate of NIC's, category A, or ordinary class 4. It is only if the contracted out scheme is a fully registered occupational one that payroll deals with a lower rate of NIC, usually at category F. There is something called a c/o rebate which is paid to the provider of the scheme and helps to ensure the final private pension is at least as good as the state equivalent.

Remember, though, that from April 2012 the c/o rebate for ordinary pension schemes will stop so there will be no financial incentive to have a private pension. Many of us are expecting the rebate for salary related schemes to be dropped within a few years as well.

My understanding is that once you reach a certain age, particularly for a new pension scheme, it is financially more beneficial to be in S2P and not to c/o but that rule does not work for everyone.

It is a complicated situation and one which needs careful thought for most of us. With our scheme, for one of my companies, there was no argument, it was obvious that neither of us should be contracted out, but it will be different for others.

So the basic rule is, if he is contracted out he has no S2P and if he is not contracted out he is building up an entitlement to it. If his earnings are below LEL he will have no basic allowance or S2P, between LEL and PT he will have basic allowance plus limited S2P and above PT full basic allowance plus S2P based on an assumption of earnings of around £12k a year minimum, irrespective of the actual earnings, so it is actually quite generous.

Generally I would advise keeping out of it because the pitfalls for getting any of it wrong are pretty serious.

Payrollpro

noodles

thank you both for your great replies, I think that I have started to digest the information, glad I do not deal in pensions, it is awfully confusing ............
thank you again
Nicky

payrollpro

Noodles,

Remember the true meaning of DIY, it actually stands for Don't Involve Yourself! works for me, except I do get involved in pensions, so actually, now when I think about it, it doesn't work for me - oh well.