State Pension contracted out: What does it mean to be contracted out of the State Pension? | Personal Finance | Finance

The State Pension comes in two forms, the Basic State Pension and the New State Pension. The Basic State Pension is the old kind and comes at £134.25 for the full amount. In contrast, the New State Pension comes at £175.20 per week at its maximum, and the amount you will get depends entirely on how many qualifying National Insurance years you have when you reach the right age.

What does it mean to be contracted out of the State Pension?

The rules of being contracted out only apply to the old State Pension.

Under the old State Pension rules, you were able to contract yourself out of the additional State Pension.

The system of contracting out ended in April 2016, but your history will still affect how much State Pension you get under both the old and new system.

In addition to the basic State Pension, the Government used to provide a second-tier top-up pension scheme based on how much you earn.

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This was called the additional State Pension and was introduced in 1978.

Originally, it went by the name State Earnings Related Pension Scheme (SERPS), before becoming the State Second Pension (S2P) in 2002.

Before the rules changed in 2021, employees had the option of ‘contracting out’ of this additional pension scheme.

In exchange, they would receive lower or redirected National Insurance contributions, they gave up part or all of it and would receive extra pension from their occupational scheme or personal/stakeholder pension instead.

Under the new system, as with the old one, those who contracted out of the scheme will get less State Pension than those who opted in.

Millions of workers will also start paying higher rates of NI as the end of contracting out in the final salary schemes means they now pay full contributions.

If you were contracted out but carried on working for a number of years after 2016, making full NI payments, you can build up further state pension until you reach the new, maximum amount.

The new rules mean nobody will lose any additional State Pension they’ve accrued by making full NI contributions.

Whichever value is the highest, under the old or new system, will be your starting amount.

If this is more than the new maximum, full level of State Pension of £175.20 per week, you will be eligible to receive the higher amount.

The new State Pension system was introduced to be fairer and less complicated for pensioners.

One of the main aims of the revised pension scheme was to improve the position of those historically denied access to the additional State Pension, including women, particularly stay-at-home mums, and those in low-paid employment.

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