- Via a defined benefit (final salary) occupational scheme, in which case both you and your employer pay reduced NICs.
- Via a defined contribution occupational scheme, sometimes called a contracted out money purchase scheme (COMPS). Your and your employer’s NICs are reduced, and there is an additional age-related payment made to the scheme for each member by HMRC National Insurance Contributions.
- Via a personal pension (including stakeholder pension). There is no reduction in NICs, but age-related rebates (larger than for defined contribution schemes) are paid by HMRC into the pension plan.
For defined benefit schemes, normally the overall pension provided will be greater than S2P alone would have produced, although inflation protection once the pension is paid will generally be limited to a maximum of 2.5% or possibly 5% a year unless you are a member of a public sector scheme.
For defined contribution schemes and personal pensions, the ultimate benefits depend upon investment performance, the charges within the plan and annuity rates when your benefits are drawn; the overall pension could therefore be lower or higher than S2P alone would have provided.
The decision to contract out is not a one-off and should be reviewed regularly.Last Updated
