Contracting-out of the additional state pension—what does it mean?
Contracting-out of the additional state pension—what does it mean?

The following Pensions guidance note provides comprehensive and up to date legal information covering:

  • Contracting-out of the additional state pension—what does it mean?
  • What does 'contracting-out' mean?
  • How and why did contracting-out disappear?
  • Pre-abolition contracting-out regime
  • Post-abolition contracting-out regime
  • Has contracting-out legislation ever been overriding?
  • Other types of contracted-out rights

What does 'contracting-out' mean?

Before 6 April 2016, there were two levels of State pension provision:

  1. the basic State pension—this was a flat rate broadly based on the amount of National Insurance Contributions (NICs) a person has paid or treated as having paid, and

  2. the additional State pension known as the State Second Pension (S2P)—as its name indicates, it was a pension paid on top of the basic State pension. It was related to an individual's earnings. Note that prior to April 2002, the additional State pension was known as the State Earnings Related Pension Scheme (SERPS)

Before 6 April 2016, pension schemes could either 'contract in' or 'contract out' of the additional State pension.

If a pension scheme was 'contracted-in' to the additional State pension, members would receive the additional State Pension on top of their basic State pension (depending on their earnings).

If a pension scheme was 'contracted-out' of the additional State pension, scheme members would not receive the additional State pension. In exchange:

  1. the scheme had to provide the member with contracted-out benefits that were broadly at least as good as the additional State pension they had given up, and

  2. the relevant member (and their employer) received rebates on their NICs (known as contracted-out rebates).

Contracting-out was therefore a mechanism through which an individual (whether employed or self-employed) could