After Contracting Out

Once you decide to contract out of the State Second Pension, or S2P, (see Contracting Out), you will continue to pay National Insurance contributions at the same rate. A part of these contributions will however be refunded in the form of a NI rebate into your non-state pension scheme (see Non-State Pensions). The exact value of this NI rebate will depend on your age and your salary. Calculating your NI rebate is complex and influenced by a variety of factors; your individual NI rebate can be calculated by your pension scheme administrator. Generally, the more you earn and the older you are, the higher the rebate you receive.

Once you have contracted out you can always contract back into the State Second Pension if you are concerned that your personal pension investments will not outperform the state system, that the NI rebate is very low one year, or if you believe the state will provide more generously than your independent pension provider when you come to retire. You can contract in and out of the State Second Pension as you wish; ask your pension scheme administrator for their opinion, or seek assistance from an independent financial advisor if you are unsure of your best options.

The NI rebate will be paid into the non-state pension scheme you nominate for every year that you are contracted out of S2P. This rebate may be added to other contributions you make, or it may build into a separate, additional pension fund. The money you have invested in the non-state pension, including any NI rebates, will be invested according to the rules of the individual pension scheme. The scheme may invest your contributions and create a fund of money you can use to buy a pension on retirement, known as a money purchase scheme, or it may give you a certain amount of pension for every year you have been a scheme member.

When you reach retirement you will not be entitled to receive State Second Pension, but you will be entitled to an alternative additional pension that you have built up through your personal pension scheme. However, in practice most people do not remain contracted out of the State Second Pension forever, and it is likely that more and more people will contract back in once contracting out has been abolished. As a result you may well be eligible to receive some contracted out pension for years spent contracted out, and some State Second Pension for years spent contracted in, and perhaps even some SERPS, the previous State Second Pension scheme, as well! For more information on SERPS and the State Second Pension, see State Second Pension.