Details on Does Pension drawdown work

By Aharon Deans

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

It's actually possible to contract out of the additional state pension by using a private allowance plan that is granted to accept NIC deductions, called an appropriate personal allowance plan (APPP). To be eligible to contract out, the individual must be employed and pay the full rate of National Insurance Contributions.

If a worker contracts out through an APPP, some of their NICs are redirected to the APPP in the form of repayments. The rebates are age-implicated; the older a worker, the greater 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 rebates is now such that advising a client to contract out is not very likely to represent acceptable information. Keeping that in mind, the lower half of this section explains the basis on which those who have contracted out during the past will have built up benefits.

Nonetheless since A Day it's now possible to use previous protected rights monies (i.e. Funds that have accumulated from contracted out kickbacks) with a drawdown plan. Therefore 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 worker 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 work out the remission 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 often known as a protected rights fund.

Deductions 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 incentives are owing above and beyond any contributions to a private or stakeholder annuity. NIC payments are reviewed on a five-yearly basis.

Actually, an advisor today would concentrate more on if 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