What does "contracted out of the additional State Pension" mean?

Contracting out through an occupational scheme means that you and your employer pay lower National Insurance contributions to compensate for any additional State Pension you have given up. When you retire, most of your second pension will come from your employer’s scheme and not from the additional State Pension. However, even if you contract out of the State Second Pension, you may still be able to build up some rights to it. For the tax year 2004/05, a member of a contracted-out occupational scheme earning between £4,108 and £26,600 will get a State Second Pension top-up. A person contributing to a contracted-out personal or stakeholder pension earning between £4,108 and £11,600 in the tax year 2004/05 will also get a State Second Pension top-up for that year. The top-up reflects the more generous additional pension the State Second Pension provides and should make sure that low earners will not be worse off by contracting out.

Schemes can only be contracted out of the State Second Pension if the Inland Revenue is satisfied that they meet the relevant conditions.

Your employer is responsible for making sure that their scheme meets these conditions, and they must tell you if the scheme is contracted out of the additional State Pension.

If you want to know more about contracting out, click here for details about how you can get a copy of Contracted-out pensions – Your guide (PM7).