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Contracting-out of the State Second Pension

The State Second Pension, sometimes called the additional State Pension, is paid on top of the basic State Pension.

If you're an employee you'll be entitled to receive the State Second Pension if you pay full-rate National Insurance contributions. If your earnings are between the 'lower earnings limit' (£107 a week for 2012-13 tax year) and the 'primary threshold' (£146 a week for 2012-13 tax year) they'll normally count towards the State Second Pension even if you don't pay any contributions.

You can ‘contract out’ of the State Second Pension if you either:

• join your employer's contracted-out occupational pension scheme
• have an appropriate stakeholder or personal pension scheme

If you contract out of the State Second Pension you'll lose some or all of your entitlement to it. Instead you will receive your pension from your pension scheme.

• Check current National Insurance contributions rates on the HMRC website Opens new window

• Understanding the Additonal State Pension

• Understanding occupational (company) and personal pensions (pensions and retirement planning section)

Your National Insurance contributions if you contract out of the State Second Pension

If you contract out of the State Second Pension you'll be entitled to National Insurance contributions rebates. These are paid into your pension scheme to compensate for the State Second Pension you've given up.

If you contract out and pay into an occupational pension scheme

If you contract out because you're a member of your employer's occupational pension scheme:

• you and your employer will pay reduced National Insurance contributions
• your employer will pay at least the amount saved in contributions into the scheme
• HM Revenue & Customs (HMRC) will pay an additional rebate into the scheme based on your age and your earnings if your scheme is a 'contracted-out money purchase scheme'

A contracted-out money purchase scheme is one where your pension depends on how much has been paid in and on the value of your fund when you retire.

You'll pay a reduced National Insurance contributions rate on your earnings up to the ‘upper accrual point’. This is 10.6 per cent instead of the standard rate of 12 per cent (2012-13 tax year rates).

• Check current National Insurance contributions rates on the HMRC website Opens new window

• Understanding occupational (company) and personal pensions (pensions and retirement planning section)

If you contract out and pay into a personal pension scheme

If you contract out because you have an appropriate stakeholder or personal pension scheme you'll keep paying full-rate National Insurance contributions. At the end of the tax year HMRC will pay 'minimum contributions' into the scheme. The minimum contributions are the difference between the contracted-out and non contracted-out rates, plus a rebate based on your age and your earnings.

At the same time, HMRC will also pay the tax relief you're entitled to into the scheme.

The annual statement your pension provider sends you will show the amount of minimum contributions HMRC has paid into your pension scheme.

You can follow the first link below to find out more about minimum contributions including how they're worked out.

• Download 'Employees guide to minimum contributions' (PDF, 224K) Opens new window

• Help with PDF files

• Company and personal pensions (pensions and retirement planning section) - learn more

Your National Insurance contributions if you don't contract out of the State Second Pension

If you choose not to contract out you'll pay National Insurance contributions in the usual way. You won't be entitled to any rebates but you will build up your entitlement to the State Second Pension.

Changes to contracting out from April 2012

From April 2012, you won't be able to contract out of the State Second Pension by joining:

• a personal or stakeholder pension scheme
• a contracted-out money purchase ('defined contribution') occupational pension scheme

Find out more about the changes, including what will happen if you're already paying into one of these schemes, by following the link below.

If you’ve contracted out into a final salary occupational pension scheme you’ll not be affected by the changes.

• Contracting out of the additional State Pension

Where to get more help

If you want more information about your pension and contracting out you should first contact the scheme provider or speak to an independent financial adviser.

You can write to HMRC at:

HMRC National Insurance Contributions Office
Services to Pensions Industry (Personal Pensions)
Benton Park View
Newcastle upon Tyne
NE98 1ZZ

You can also call the HMRC Contracted-out Pensions Helpline by following the first link below.

You can find more information on contracted-out pensions by following the second link below.

• Contracted-out Pensions Helpline Opens new window

• Help with PDF files

More useful links

• National Insurance - the basics

• Employee tax and National Insurance