There are two parts to the State Pension:
The Basic State Pension is what most people will be entitled to this and the amount you receive depends on the amount of National Insurance you have paid. So if you have breaks in your career, you may not get the full entitlement. By 2020, this will be payable from the age of 65 for everyone (prior to the 1995 Pensions Act, women could receive the pension from age 60 however women born after 6 April 1955 will receive it from age 65).
The Additional State Pension (or S2P or SERPS) will apply if you are or have been an employee at any stage and have therefore paid Employees Class 1 National Insurance Contributions. If you have always been self-employed, you will not qualify for this benefit.
Opting out of state pension
It is possible to opt out of the additional State pension – this is known as contracting out – in this case, a rebate of your National Insurance Contributions will be invested in your pension scheme. See the links below for details of the types of scheme that this can be arranged through.
You can choose to contract back into the State scheme in the future if you wish.
Whether you would benefit from contracting out of the State scheme depends on your individual circumstances (such as your age, sex, earnings and the type of pension scheme, if any, you have). It is always a good idea to seek professional advice on this issue. If you would like to talk to a financial adviser, please complete our Quick Enquiry Form. We can also arrange for an estimate of how much pension you could be entitled to from the State when you retire.
Contracting out Guides
Stakeholder Pensions
It is possible to mobilise your stakeholder pension to contract out of the State Second Pension.
The State Second Pension – formerly called the State Earnings-Related Pension Scheme (SERPS) – is for anyone in work who earns above the lower earnings limit.
If you feel you would prefer to contract out of the second arrangement, then it is up to you to construct a replacement, in combination with a private pension arrangement (just like a normal stakeholder pension).
National insurance rebates and tax relief would then be paid into your stakeholder pension (you would still continue to pay NI contributions in full).
Whether you should ultimately contract out will depend largely on your age, and on how much you earn (anyone opting out would still be entitled to the basic state pension). It might pay you to take advice from an independent financial adviser or complete our pension enquiry Form for more information. The cost to you may be higher initially, but lower in the long-term. For anyone who is comfortable with taking higher risk stock market investments over the long term, then contracting out might look attractive.
Occupational Pensions
In addition to the basic state pension, most people are eligible for the additional state pension formerly known as the State Earnings-Related Pension Scheme (SERPS) before it was reformed in April 2002.
It is now referred to as S2P and is based on your earnings and how much Class 1 National Insurance you have paid.
When a company pension scheme is set up, the employer has two options for his employees relating to the second state pension.
Employers can choose for his employees to receive their company pension then their state benefits in 2 parts – basic state pension and second state pension (S2P).
They can decide to contract out of the additional state pension and the benefits from this are then included within the company pension.
If the scheme is contracted out, the government will make contributions into the pension scheme on behalf of the scheme members and the employers and employees National Insurance contributions will reduce.
The way this works depends on when the pension was set up – the rules have changed for schemes established after 5 April 1997 following the Pensions Act 1995. The rules are also different for money purchase or final salary schemes.
If you would like to know more about this and how these rules affect your pension, please complete our pension enquiry Form and we will arrange for an expert to get in touch with you.
Personal Pensions
In addition to the basic state pension, many people are eligible for the additional state pension, formerly known as the State Earnings-Related Pension Scheme (SERPS) before it was reformed in April 2002.
The second state pension is based on your earnings and how much Class 1 National Insurance you have paid.
If you have a personal pension scheme, you have the option to contract out of the additional state pension. By contacting out, the government will then make a contribution into your personal pension scheme on your behalf in place of the additional state pension.
The amount that the government will contribute, known as the minimum contribution will vary from person or person. It is a rebate of some of the National Insurance you have paid and includes income tax relief on your rebate. The contracting out of the additional state pension must be approved by the Department of work and the Inland Revenue.
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. Complete our pension enquiry Form if you would like some advice about this
Contracting out of state pension
