Goodbye contracting-out

In what is turning out to be an interesting day for pension announcements, it was confirmed earlier today that contracting-out under defined contribution pension schemes will be abolished from 6th April 2012.

This follows an earlier proposal and means certainty that the ability to contract-out of the State Second Pension (S2P) using a personal pension, Stakeholder pension or defined contribution (money purchase) occupational pensions will finish at the start of the 2012/13 tax year.

Only those people in defined benefit (final salary) pension schemes will still have the ability to contract out.

If you are currently contracted-out of S2P with a defined contribution pension scheme, this announcement means that from 6th April 2012 you will be contracted back in and start to build an entitlement to the State Second Pension.

Whilst this move will simplify what is a quite complex decision for many people, it does reduce the choice and flexibility associated with saving for an income in retirement.

Abolishing the option means that people in retirement will have to accept a State Second Pension, rather than build up a protected rights pension fund which comes with a higher degree of flexibility for taking benefits.