Budget 2011 and the end to contracted out pension schemes - how will this effect AFPS

Discussion in 'Armed Forces Pension Scheme' started by Zequic, Mar 27, 2011.

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  1. I have just read this: Millions face tax hike in £6bn pension raid | This is Money.

    The bit that grabbed my attention is that this bit;

    "Last week's Budget document said this earnings-related add-on to the £97.65 a week basic payment will effectively be abolished to clear the way for a higher 'single tier' pension for all. But seven million Britons will lose generous National Insurance rebates worth up to £556 a year as a consequence. Currently, employees can opt out of the earnings-related State Second Pension (formerly called SERPS) and save into their company's final salary pension instead. This 'contracting out' trick slashes 1.6% off their National Insurance contributions. The discount is justified on the grounds of smaller state payouts in retirement. So instead of paying NI at the full 11% of income, the opt-outs pay 9.4%. The rebate is worth £556 a year maximum, according to pension consultants Towers Watson – an extra sum they'll need to stump up when the £140 a week pension arrives."

    I have three not so simple questions;

    1. Is AFPS defined as contracted out, as I believe it is?
    2. Does this mean that we currently pay 9.4% NI and not 11%, also as I believe we do?
    3. Does this mean that we are going to get humped for an effective 2.6% tax increase by Apr 2012 (1.6% from contracted out changes Apr 2012 and 1% from the Employees NI increase this year?

    Can anyone shed any light?
  2. You are right, two of these questions are not so simple. The simple one is the first, AFPSs and RFPS are all contracted out of the State Second Pension (S2P) arrangements. If the Armed Forces schemes contract back into S2P the full national insurance contribution will be payable BUT public sector pension schemes are still digesting Hutton's report and the budget statement and we don't know yet what they will decide to do.