Many Global QROPS clients are members of employer sponsored or personal pension schemes where they have ‘contracted-out’. Before an individual looks at potentially transferring their UK pension benefits to a Qualifying Recognized Overseas Pension Scheme (QROPS), they should, ideally, be familiar with what contracting out means.
What is contracting-out?
Contracting out is, basically, when an individual receives private pension benefits instead of part or all of their entitlement to additional state pension – which is now called the Second State Pension (S2P) but was previously know as the State Earnings Related Pension (SERPS) and prior to that the State Graduated pension.
An employer has two options, when choosing to contract a scheme member out of S2P. Either the member can be in a defined benefit (final salary) pension scheme, in which case they are contracted out on a salary related basis (COSR), or the member may be in a defined contribution scheme – in which case they are Contracted out on a money purchase basis (COMP).
Should an employer not offer contracting out in the employer’s scheme an individual can use a stakeholder or personal pension to contract out.
For those people that have employment based on self employed earnings, contracting out is not available.
Should I contract out?
If you are a member of an employer’s pension scheme, you could be contracted out without even realizing it. For those that are looking to migrate now, or in the future, having contracted out rights is advantageous. As being contracted out allows you to have a separate pension fund built up from the State, in your own right, that is transferrable to a QROPS whilst not affecting your Basic State pension benefits.