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Phone 0800 1223 170

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Lines open: Mon - Fri 9am- 5:30pm

Phone 0800 1223 170

to make a telephone application

Lines open: Mon - Fri 9am- 5:30pm

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Copyright 2016 by Pension Tracing Service ® 

This service is not affiliated with the Department of Work and Pensions or any government body. The Pension Tracing Service does not offer financial advice to our clients. However we can allocate you an Authorised and Regulated Pension Specialist. 

Copyright 2016 by Pension Tracing Service ® 

This service is not affiliated with the Department of Work and Pensions or any government body. The Pension Tracing Service does not offer financial advice to our clients. However we can allocate you an Authorised and Regulated Pension Specialist. 

Contracting out

Contracting out

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 of the additional state pension. 

By contracting out, 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 scheme 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. Important 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.

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 of the additional state pension. 

By contracting out, 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 scheme 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. Important 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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