Contracting out of the additional State Pension
If you are an employee with annual earnings above a certain amount (£5,772 in 2014-2015 tax year) you may be able to leave the additional State Pension scheme. This is "contracting out".
How does contracting out work?
You can only contract out if your employer runs a contracted-out workplace pension scheme.
To contract out you must:
- earn at least the lower earnings limit of £5,772 a year in 2014-2015
- pay Class 1 National Insurance (or treated as paying them - check with your employer)
When you join the scheme, you and your employer pay lower, reduced rate National Insurance contributions.
If you’re a member of a contracted-out workplace pension you don’t contribute to the Additional State Pension for the time you belong to the scheme. This means that when you retire you either don’t get any Additional State Pension or it might be reduced, depending on how long you contracted out.
Salary-related pension schemes
If you’re a member of a salary-related pension scheme which began before 6 April 1997, you have ‘Guaranteed Minimum Pension’ rights. This pension can’t be taken before age 65 (men) or 60 (women). The Guaranteed Minimum Pension will continue to be paid at these ages when the State Pension age rises.
Since 6 April 2012, you can't contract out of the State Second Pension by joining:
- a personal or stakeholder pension scheme
- a contracted-out money purchase, defined contribution workplace pension scheme
If you’ve contracted out to a final salary, defined benefit workplace pension scheme you aren't affected by the changes.
If you contracted out before 6 April 2012
If you contracted out to a personal, stakeholder or defined contribution pension scheme which began before 6 April 2012, you can:
- continue to make your own contributions to the scheme
- continue to benefit from any employer contributions to the scheme
- no longer benefit from any rebate of National Insurance contributions
Contracting out to a defined benefit workplace pension scheme is still allowed.