Contracted Out Money Purchase Pension Scheme

A contracted-out money purchase pension scheme (COMPPS) is a type of private pension plan in the United Kingdom. This pension scheme is designed for employees who have opted out of the state pension scheme and have decided to contract out their contributions to a private company. In this article, we will take a closer look at what a COMPPS scheme is, how it works, and the benefits it offers.

What is a COMPPS scheme?

A COMPPS scheme is a type of defined contribution pension plan that is run by a private company. It`s designed for employees who have opted out of the state pension scheme and have decided to direct their National Insurance contributions (NIC) to their own pension fund. In other words, they are contributing towards their own retirement fund instead of relying solely on the state pension.

How does a COMPPS scheme work?

An employee who opts out of the state pension scheme and chooses a COMPPS will pay lower NICs. The employee`s employer will also pay a reduced rate of Employer National Insurance contributions (ENICs). These savings can then be used to build up a pension pot over time. The pension pot will be invested in a range of assets, such as stocks, bonds, and property funds, with the aim of generating a return that will help the pension pot grow.

Once the employee has reached retirement age, they can choose to take their pension benefits in a number of different ways. They can opt for a lump sum payment, drawdown, or purchase an annuity. The pension provider will calculate the amount of pension benefits available to the employee based on the value of their pension pot and other factors, such as their age and the prevailing annuity rates.

What are the benefits of a COMPPS scheme?

There are several benefits of choosing a COMPPS scheme. Firstly, the employee will have more control over their retirement savings. They will be able to choose where their contributions are invested and will have a range of investment options to choose from. This can provide greater flexibility and potentially better returns than the state pension scheme.

Secondly, employees who choose a COMPPS scheme will receive a higher level of retirement income than if they had relied solely on the state pension. This is because their contributions will have been invested to generate returns over time, leading to a larger pension pot at retirement.

Finally, a COMPPS scheme can be a useful tool for retirement planning. By contributing to a private pension plan, employees can build up a significant pension pot over time that can provide a source of retirement income. This can help to ensure financial security in retirement and provide peace of mind.

In conclusion, a COMPPS scheme is a private pension plan that offers employees the opportunity to build up a retirement fund in addition to the state pension. By contracting out their National Insurance contributions, employees can direct this money towards their own pension scheme, potentially providing greater control, flexibility, and retirement income than the state pension scheme alone.