Contracting Out of the Second State Pension

Leaving the State Second Pension is called 'contracting out'. If you do this, you give up your State Second Pension entitlement and instead build up a replacement for it in your own private pension. This can be an employer's pension scheme, your own stakeholder pension or another personal pension.

Some employers' occupational pension schemes contract out all their pension scheme members automatically. Others 'contract in' and pay a pension on top of any State Second Pension entitlement. If you are in one of these contraced-in schemes, you can still choose to contract out and take out a personal or stakeholder pension.

If you're not a member of your employer's occupational scheme but you have a personal or stakeholder pension, you can use your pension arrangement to contract out.

If you contract out using a personal or stakeholder pension, the Inland Revenue will reimburse you for your National Insurance contributions and pay this into your private pension fund. This is invested and you build up a replacement pension for the State Second Pension you have given up.

The Government sets the level of reimbursement that is paid into your pension scheme. It's meant to give you the same benefits you would have received if you had stayed in the State Second Pension.

Contracting out is an important decision and you need to consider all the implications, particularly if you are nearing retirement age. If you'd like help with your decision, you should contact an Independent Financial Adviser. You may have to pay for the advice you receive. Alternatively, you can ask your pension provider for a comparison of the State Second Pension you will be giving up and the possible replacement pension you may receive.

If you decide to contract out in one tax year, you don't have to do the same in other years. In fact, it's a good idea to review your decision regularly.

To find out if Contracting Out may be right for you, please complete the short form here.

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