A contracted out money purchase scheme, commonly known as COMPs, is a pension arrangement where an employer and employee contribute to a personal pension plan or group personal pension plan. The scheme is contracted out of the State Second Pension (S2P) or its predecessor, State Earnings-Related Pension Scheme (SERPS).
With the introduction of the Pensions Act 2014, all contracted out schemes were abolished, and the National Insurance rebates were discontinued. However, if you were contracted out before April 2016, you may still have a contracted out pension scheme.
Employers who set up a COMPs scheme are required to provide a minimum level of contributions, which must meet the statutory requirements set by The Pensions Regulator. These contributions must be at least 8% of the employee`s qualifying earnings, with a minimum of 3% contributed by the employer.
One of the main benefits of a COMPs scheme is that the contributions made by employees and employers are invested into a personal pension plan, which is managed by a financial institution, such as an insurance company or a fund manager. This means that employees can benefit from the expertise of financial professionals who manage their investments.
Another advantage of a COMPs scheme is that employees have control over their pension savings. They can choose how much they want to contribute and how their contributions are invested. This provides them with the flexibility to tailor their pensions to their specific needs and goals.
When an employee retires, they can choose to receive their pension as an annuity or as a cash lump sum. An annuity is a guaranteed income for life, while a cash lump sum provides the employee with a lump sum payment that they can use as they wish.
In conclusion, a contracted out money purchase scheme is a flexible and beneficial pension arrangement for both employers and employees. It provides employees with control over their pension savings, and employers with a cost-effective way to offer pension benefits to their employees. If you have a COMPs scheme, it is essential to review it regularly to ensure that it meets your retirement needs and goals.