Contracting Out Pension

As well as the basic state pension, you may also be eligible for the additional state pension, formerly known as the State Earnings-Related Pension Scheme before it was reformed in April 2002.

It is now referred to as the state second pension (S2P) and is based on your earnings and how much Class 1 National Insurance you have paid. However, if your employer offers a pension scheme, it may decide to opt-out of the additional state pension - known as contracting out. This means that if you join the company pension scheme, you too will automatically be contracted out pension of the additional state pension.

By contracting out pension, both you and your employer will pay lower, reduced-rate National Insurance contributions. When you retire, your second pension will come from your employer’s scheme and not from the additional state pension. If the programme is contracted out on a money purchase – or defined contribution– scheme, HM Revenue & Customs (HMRC) will also pay an additional rebate direct to the scheme for investment on your behalf.

This is intended to compensate for the additional state pension you’ve given up.

Stakeholder and personal pensions

You can also contract out with a stakeholder pension or personal pension. Instead of paying lower National Insurance contributions, HMRC will pay a sum of money into your personal pension once a year.

This will be a rebate of some of the National Insurance you have paid and includes income tax relief on your rebate. Since 2002, some people have also been able to build up a small entitlement to the additional state pension as well. This is due to more generous state benefits for lower-income earners and aims to prevent them being at a disadvantage when they contract out.

If you are considering contracting out of the additional state pension, it is worth seeking professional advice to find out whether this is the best option for you as there are a number of factors that will need to be considered such as your age and level of earnings. In some cases, it may be more beneficial to continue with the state system. Necessary changes in 2012 Contracting out through money purchase, personal pension and stakeholder pensions will be abolished from 6 April 2012.

This means that if you’re contracted out through one of these schemes at the time, you will automatically be brought back into the additional state pension. This means you will then pay the standard rate of National Insurance contributions instead of the reduced rate.

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Contact us

You can also request contact details from the Pension Tracing Service by phone or by post.

The Pension Tracing Service
Telephone: 0800 1223 170
From outside the UK: +44 (0) 1782 389134
Monday to Friday, 9:30 am to 5:00 pm

The Pension Tracing Service
The Lantern
High Street
EX34 9QB

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