DB – end of contracting out 6/4/16, HMRC registration ends 5/4/16

On 6 April 2016 the current basic state pension and state second pension (S2P) will be abolished and replaced by a single-tier state pension.

Contracting out will cease for defined benefit (DB) schemes, this due to the introduction of the single tier state pension. Employers and trustees alike will need to communicate what this will mean for members and themselves be prepared for the changes.

Employers and trustees must address the implications of this major change and should consider registering with HM Revenue & Customs' (HMRC's) reconciliation service and communicating changes to members.

The HMRC service will close to registration form April 5th 2016; from this date the HMRC will assume schemes not registered are content with the accuracy of their data.

If members have been in a contracted out defined benefit (DB) scheme, then a lower NI contribution will have been paid in return for higher returns in their occupational pensions.

Employers and employees will have paid less NI contributions during the contracted out term. Those in a defined contribution (DC) scheme were contracted back in and paid National Insurance at the full rate from 2012.

The end of contracting out for members means they will see their NI contributions rise by 1.4% on incomes between GBP 8,060 and GBP 42,380, which works out at up to ?40 a month in extra tax. And for employers this means contributions will rise by up to GBP 97 a month per scheme member, which can equates to a vast amounts of money.

The Government intends to allow employers to amend contracted-out schemes to increase employees' contributions and/or reduce future accrual rates in order to offset the increase in their NICs.

However, if there are changes to benefits or contributions then the employer will need to meet statutory requirements to consult with members.

Trustees need to inform members that they have ceased to contract out by 6 July 2016 and will now be contracted in to the new single-tier state pension.

Communications on benefits and joining information needs to be reviewed and added to scheme booklets.

First published 24.03.2016

ceri.pugh@wilmingtonplc.com