If you've ever spotted "contracted out" on an old pension statement, payslip or P60 and wondered what on earth it means — this guide is the plain-English answer.
Between 1978 and 2016, UK employees could be contracted out of the State Earnings-Related Pension Scheme (SERPS) — and later its successor, the State Second Pension (S2P). Contracting out meant a portion of your National Insurance contributions was redirected from the State scheme into a private or workplace pension instead.
Millions of UK workers were contracted out at some point — many without realising it, because the decision was made by their employer. If you were one of them, two things follow: your State Pension is slightly reduced for the contracted-out years, and you have a private pension pot somewhere with the redirected money in it.
This guide explains how contracting out worked, why it happened, what it means for your retirement income today, and how to find any contracted-out money you've lost track of.
Under the original SERPS scheme (1978–2002), and later under the State Second Pension (2002–2016), employees built up an additional state pension entitlement on top of the basic State Pension. This was funded by an extra slice of National Insurance contributions on earnings between the Lower and Upper Earnings Limits.
Contracting out was a system that let you (or, more commonly, your employer) choose to opt you out of the State additional pension and instead have those NI contributions redirected into a private or workplace pension scheme. In exchange:
Your NI contribution rate was lower during contracted-out periods (you and your employer paid less)
The NI rebate went into the alternative pension scheme
You'd receive less SERPS / Additional State Pension at retirement, but more in your private pension
For workers in good workplace schemes, this was often a sensible deal. For others, it was a catastrophic mis-sell (more on that below).
The Government wanted to:
Encourage workplace pension saving (give employers an incentive to set up good schemes)
Reduce State pension liabilities in the long term
Allow individual choice in how retirement saving was structured
The argument was: if your private/workplace pension is good enough to replace the State additional pension, why force you into the State scheme? Contracting out was the mechanism that let you opt out without losing the underlying value (because the NI rebate followed you into the private scheme).
Depending on the year and the type of scheme, contracted-out NI rebates went into one of three structures:
Defined-benefit (final salary) workplace schemes. Your contracted-out years counted as scheme service, accruing an income at scheme retirement age.
The scheme had to provide a Guaranteed Minimum Pension (GMP) at least equal to the SERPS entitlement you'd otherwise have built up. Many traditional UK employer pension schemes (banks, councils, large manufacturers) operated COSR arrangements.
Defined-contribution workplace schemes. The contracted-out NI rebate added to your DC pot. The pot value at retirement depended on contributions and investment performance.
Common in workplace pensions set up after 1988. The Government withdrew COMP contracting out in 2012.
Personal pensions you set up yourself, as an individual, that received contracted-out NI rebates instead of going into SERPS. Hugely promoted by financial salespeople in the late 1980s and early 1990s.
The APP route was the source of much of the SERPS mis-selling scandal — many people were sold APPs that left them worse off than they'd have been in SERPS or in a workplace pension scheme. (See SERPS Compensation & Refunds for more.)
Personal pensions and DC workplace schemes — contracting out ended in April 2012
Defined-benefit (final salary) schemes — contracting out ended in April 2016, when the new flat-rate State Pension was introduced
Since April 2016, nobody can be contracted out. Everyone's NI contributions go into the new State Pension on a uniform basis. If you've started work after April 2016, contracting out doesn't apply to you.
If you were contracted out for some of your working life, your State Pension forecast is adjusted downward for those years — because the contracted-out NI was redirected into a private pension instead of into the State Additional Pension.
The exact mechanics depend on when you reach State Pension age:
You receive:
Basic State Pension (full amount if you have 30+ qualifying years of NI)
Plus Additional State Pension (SERPS / S2P) for any non-contracted-out years
Minus the contracted-out adjustment (broadly equivalent to the SERPS you'd have built up if not contracted out)
You're under the new State Pension. The DWP calculates a starting amount under transitional rules:
Old rules: basic State Pension + Additional State Pension - contracted-out deduction
New rules: full new State Pension - "Contracted-Out Pension Equivalent" (COPE)
You receive the higher of the two. The COPE figure represents the amount the State assumes you've built up in your private pension from the contracted-out NI rebates. Your forecast won't itemise it as a separate line, but it's reflected in the total.
If you've worked enough qualifying years since 2016, you can build your State Pension back up to the full new amount — voluntary NI contributions to fill any gaps can also help.
This is where it gets practical. The contracted-out NI rebates went into a specific scheme — and the money is still there, somewhere, with your name on it. UK pensions don't expire.
The path to find it:
Confirm you were contracted out (old payslips or your State Pension forecast often shows this)
Request HMRC's contracted-out records — they identify which scheme administrator received the rebates
Identify the current administrator of that scheme (many have been acquired or rebranded)
Contact the scheme for a current valuation
The full step-by-step is in How to Find Your SERPS Pension. Or we'll do the lot for free.
If you remember working for any of these types of employer between 1978 and 2016, you were almost certainly contracted out:
Public sector schemes — NHS, teachers, civil service, local government, armed forces, police, firefighters all contracted out by default
Bank workplace pensions — most major UK banks (Lloyds, Barclays, NatWest/RBS, HSBC) ran contracted-out schemes
Large private sector employers — BT, Royal Mail, BBC, supermarkets (Tesco, Sainsbury's, Asda), utilities, manufacturers
Workplace pensions provided by major insurers — Aviva, Scottish Widows, Standard Life, Aegon, Royal London, Prudential, Friends Provident all offered contracted-out workplace schemes
If your employment history includes any of these, you almost certainly have contracted-out money in a private pension somewhere.
It means a portion of your National Insurance contributions was redirected from the State SERPS / Additional State Pension scheme into a private or workplace pension scheme instead. You receive less SERPS at retirement, but the redirected money sits in a private pension pot.
It depended entirely on the alternative scheme. For people in good defined-benefit workplace schemes (banks, public sector), contracting out usually worked out well or neutral. For people sold poor-performing personal pensions in the late 1980s and early 1990s, contracting out was often financially damaging — and was the basis of major mis-selling compensation cases.
Check old payslips or annual benefit statements for "contracted out", "COSR", "COMP" or "APP" markings. Your State Pension forecast at gov.uk/check-state-pension will also reflect any contracted-out adjustment. The Gov.UK checker at gov.uk/contracted-out/check-if-you-were-contracted-out asks a few questions to confirm.
Yes — for the years you were contracted out, your State Pension is reduced (or your starting amount under the new State Pension is reduced via the COPE calculation). But the equivalent money sits in your private/workplace pension instead, so the overall picture often balances out.
No. Contracting out ended in April 2012 for personal/DC schemes and April 2016 for DB schemes. Since April 2016, all UK employees pay full-rate NI contributions and accrue the new State Pension uniformly.
Contracted-Out Pension Equivalent — the figure the DWP calculates to represent the amount the State assumes you've built up in your private pension from contracted-out NI rebates. It's used in the new State Pension transitional rules to work out your starting amount. It doesn't appear as a separate line on your forecast, but it's reflected in the total.
No — those contributions went into a private/workplace pension, not back to you directly. The "money" is in the pension scheme that received the rebates. To access it, find the scheme and follow normal UK pension access rules (typically from age 55, rising to 57 in 2028).
This is the most common situation. The pot exists somewhere — schemes have legal duties to keep records — but the original administrator may have changed. HMRC's contracted-out records identify the original scheme; from there, the Gov.UK Find Pension Contact Details tool or a tracing service can identify the current administrator. See How to Find Your SERPS Pension for the step-by-step.
No. Contracting out was specifically about opting out of the State Additional Pension into a private alternative — something employers often did automatically for their workers. "Opting out" of a workplace pension under modern auto-enrolment is a different thing entirely (deciding not to be enrolled in your current employer's workplace scheme).
Contracting out of SERPS was a system used between 1978 and 2016 that redirected part of your NI into a private or workplace pension. Your State Pension is reduced for the contracted-out years, but you have a private pension pot somewhere holding the equivalent value.
If you can't remember the scheme details, we'll find it for you for free.
Related: What is a SERPS Pension? · How to Find Your SERPS Pension · SERPS Pension Check
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