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These notes are geared to contracting out using personal / stakeholder pensions. The position for employer-sponsored schemes can be different and you should seek further guidance from your company scheme administrators. Only employees can contract out. Those who are self employed accrue no earnings related state pensions.

When people refer to contracting out they usually mean the decision that an individual has made to give up the right to receive an earnings related pension from the state for a particular tax year.
In essence, in exchange for giving up a “guaranteed” state benefit at retirement, the employee opts to receive a cash payment into his/her own pension plan
When employees who have contracted out reach the state retirement age (now 65 for all men and for women under the age of 50) they will receive a pension from a pension provider for the tax years for which they have opted to contract out. They will also receive a State Earnings Related Pension (the current version of which is S2P) pension for those years when they were in the state scheme
Under pension simplification rules, from 2010 it will be possible to take contracted out benefits prior to the state retirement age
If an employee decides to contract out of S2P the government provides a lump sum rebate of part of their National Insurance contribution into a pension plan in the employee’s name. The amount of rebate provided alters according to age and salary.
The government actuary alters the rates of rebate periodically. The lump sum rebate is paid directly by the DWP to the employee’s chosen pension provider, usually in the October following the tax year to which the rebate applies

Is it financially worthwhile Contracting Out?

With S2P came a review of the amount of cash the government will rebate to the individual deciding to contract out. If you are considering contracting out, especially if you are a high earner, then please consult us for Financial Advice.

Anyone wishing to contract out after 6th April 2002 is dealt with on an individual basis and on their own merits
The new “A” Day legislation means that those who contract out can claim their contracted out private pensions from age 55 instead of having to wait until age 65
In addition the new legislation allows people with protected rights pensions to receive 25% of their savings as a tax free lump sum which could be a big incentive to some to contract out
There is no guarantee whatsoever that by contracting out you will receive a bigger pension
you can contract back in at anytime, however, you cannot retrospectively change your mind (ie, say you want to contract back in for previous tax years) so it is essential to keep the issue under regular review