What was contracting out?

What was contracting out?

Under the old state pension rules, if you had a private pension you had the option to 'contract out' of the additional state pension.

The additional state pension was a top-up to the basic state pension. It was also known as the state earnings related pension scheme (Serps) or the state second pension.

For defined benefit schemes, contracting out involved making National Insurance contributions at a reduced rate. Instead of building up your state pension entitlement, you’d receive a boost to your workplace pot. 

For defined contribution schemes you’d pay the usual rate of NI but would have some of these contributions rebated into your workplace pension.

Contracting out ended in April 2016, but your contracting-out history will still impact how much state pension you get.

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How much is the state pension if you were contracted out?

If you qualified for the state pension before 6 April 2016, you might not get any additional state pension - or only a small amount - if you've spent time contracted out. You will still get the basic state pension.

If you qualified for the state pension on or after 6 April 2016, you might not get the full new state pension of £230.25 a week if you were contracted out.

The amount that's deducted depends on how long you were contracted out and what you were earning at the time. 

Your state pension forecast should show this amount, which is known as a ‘contracted out pension equivalent’ (COPE) - the equivalent of the additional state pension you would have got if you hadn’t been contracted out.

If you won't qualify for the full state pension, you might be able to increase your payments by topping up your National Insurance record. 

What were protected rights?

By contracting out, you and your employer paid lower NI contributions. The amount saved as a result of these lower contributions was paid into a type of pension known as a 'protected rights' pension.

In 2012, when contracting out was abolished for defined contribution schemes, protected rights pensions were abolished too and became part of an employee's ordinary pension pot.

What is the guaranteed minimum pension (GMP)?

The guaranteed minimum pension (GMP) is the minimum pension provided by a workplace pension scheme to employees who were contracted out of the additional state pension (then known as Serps) between 6 April 1978 and 5 April 1997.

The amount of GMP you get is usually equivalent to the additional state pension you would have got if you hadn't been contracted out.

Pension schemes must increase any GMP built up between April 1988 and April 1997 in line with living costs each year, up to a cap of 3%.

For a GMP built up before 1988, there is no duty on your scheme to provide inflation-linked increases.