Contracting out
If you work for an employer and earn more than £4,524 in 2007/2008, you will be automatically included in the additional State Pension scheme. But some people choose to leave the additional State Pension and join a contracted-out occupational pension if they think it will give them a higher income, or other benefits, when they claim it. Or some people may choose to do this by setting up a personal pension arrangement with an independent pension provider. This is called 'contracting out'.
Even if you do this, you may still be entitled to some additional State Pension, depending on your level of earnings, or from a period when you worked for a different employer.
If you decide to contract out, you give up your additional State Pension entitlement from that employment and build up a replacement for it in your own pension instead.
You can do this in two ways:
1. You can join your employer’s contracted-out occupational pension scheme. If you do this, you will automatically be contracted out of the additional State Pension from the date that you join the scheme. Both you and your employer will pay lower-rate National Insurance contributions and most, or all, of your second pension will then come from your employer’s scheme. Your basic State Pension will not be affected.
2. Or you can join a contracted-out personal pension scheme such as a stakeholder pension. You can choose to do this if your employer doesn’t run a contracted-out occupational pension scheme, or if they do and you don’t want to join it.
If you leave your job, or decide you are not happy with your existing occupational or personal pension arrangements, you do not have to stay contracted out.
To find out if you are already contracted out, call the HM Revenue &
Customs helpline:
0845 915 0150
8.00 am to 5.00 pm, Monday to Friday
Should I contract out?
Contracting out is not right for everyone: look carefully at your own circumstances and think about getting advice from the Pensions Advisory Service or an independent financial adviser before deciding to leave the additional State Pension.
Phone The Pensions Advisory Service on 0845 601 2923. Lines are open Monday to Friday 9.00am to 5.00pm. Calls are charged at local rates.
Find out more on The Pensions Advisory Service website
To find an Independent Financial Adviser near you visit the IFA Promotion website
Are you self-employed?
If you are self-employed, you are not covered by the additional State Pension because you pay a lower rate of National Insurance contributions. Therefore, you will not be able to contract out.
To help you decide what’s best for you if you are self-employed, read or print Pensions for the self-employed – Your guide (PM5)
To find out more about State Pensions, including the additional State Pension, read or print State pensions – Your guide (PM2)
Read or print State pensions for carers and parents – Your guide (PM9) It explains what to do to make sure you get as much State Pension as you can in the future if you have given up work, or aren’t earning very much because you are caring for someone.
Future changes to contracting out
The Pensions Act 2007 and the Pensions Act (Northern Ireland) 2008 include measures to abolish contracting out on a defined
contribution basis for money purchase occupational pension schemes
(also called defined contribution or DC schemes) and personal and stakeholder pension schemes.
Further information about how
this may affect you can be found in Contracting out of the State Second
Pension - Your guide( PM7)