Leaving the additional State Pension

You cannot leave the basic State Pension but, in some circumstances, you can choose to leave the State Second Pension and join a private scheme of some kind instead. Only earnings on which standard-rate Class 1 National Insurance contributions are paid, or treated as paid, count. This is called ‘contracting out’.

If your employer runs a contracted-out occupational pension scheme and you choose to join it, both you and your employer will pay lower National Insurance contributions. When you retire, your second pension will come from your employer’s scheme and not from the State Second Pension.

You can also contract out of the State Second Pension by joining a stakeholder pension scheme or a personal pension scheme. Instead of paying lower National Insurance contributions, once a year the Inland Revenue will pay a rebate of contributions, together with tax relief, direct to your pension scheme. These payments are known as ‘minimum contributions’. If you would like to know more about minimum contributions, please see Employee's guide to minimum contributions (CA17).

You will usually get tax relief on your contributions to a private pension scheme. With a basic rate of income tax of 22%, every £100 that goes into your pension costs you £78 (based on the tax year 2004/05). If you pay income tax at the higher rate of 40%, every £100 that goes into your pension fund costs you £60 (based on the tax year 2004/05).

Some occupational schemes and some personal pensions are organised on a ‘rebate-only’ basis. This means that the only money being paid into the scheme is the National Insurance contribution rebate. If you have chosen this sort of second pension, it will give you roughly the same pension you would get from the State Second Pension. You may still need to think about whether this will be enough to support the lifestyle you want when you retire.

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 pension 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 provided by the State Second Pension.

If you are not sure what is the best choice for you, you may want to get further help.

If you want to know more about contracting out of the State Second Pension, please see Contracted-out pensions – Your guide (PM7).