Details on Does Pension drawdown work

By Aharon Deans

What is the relationship between contracted out discounts and the usage of drawdown allowances?

It is possible to contract out of the extra state pension by employing a private annuity plan that is authorised to accept NIC deductions, called a suitable personal pension plan (APPP). To be accepted to contract out, the individual must be employed and pay the full rate of National Insurance Contributions.

If a client contracts out through an APPP, some of their NICs are redirected to the APPP in the form of rebates. The repayments are age-related; the older a worker, the larger the discount will be.

From April 2012 it will no longer be possible for an individual to contract out of S2P, and the level of discounts is now such that advising a client to contract out is unlikely to represent appropriate information. Keeping that in mind, the remainder of this section explains the basis on which those who have contracted out during the past will have built up benefits.

However , since A Day it is now possible to use previous protected rights monies (i.e. Funds that have accumulated from contracted out deductions) with a drawdown plan. So if you happen to be looking for the solution to the question does pension drawdown work with protected rights funds well post 06 April 2006, the answer is now yes!

How does it work in practice? Both personal and employer continue to pay the full rate of contracted-in NICs. At the end of the tax year, the Office for Work and Allowances (DWP) will calculate the rebate and pay it to the APPP. There will be normally a time lag on payments, with receipt around September after the end of the tax year. The APPP fund that these deductions are paid into is what is known as a protected rights fund.

Rebates are not available retrospectively but can be applied for during a tax year. Once established, contracting out by this route remains prepared unless requests are made to stop the process.

The refund and inducements are owing above and beyond any contributions to an individual or stakeholder annuity. NIC payments are reviewed on a five-yearly basis.

In fact, a confidant today would focus rather more on whether or not it is applicable for a person to contract back in to S2P now, instead of waiting for compulsory re-entitlement in 2012.

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Early Pension and Early Retirement are key issues looked at by My UK Pension Plan, an online service which connects individuals with Financial Advisers