Occupational Pensions – Contracting Out

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Occupational Pensions – Contracting Out

In addition to the basic state pension, most people are eligible for the additional state pension formerly known as the State Earnings-Related Pension Scheme (SERPS) before it was reformed in April 2002. It is now referred to as S2P and is based on your earnings and how much Class 1 National Insurance you have paid.

When a company pension scheme is set up, the employer has two options for his employees relating to the second state pension.

1. Employers can choose for his employees to receive their company pension then their state benefits in 2 parts – basic state pension and second state pension (S2P).
2. They can decide to contract out of the additional state pension and the benefits from this are then included within the company pension.
   
   

If the scheme is contracted out, the government will make contributions into the pension scheme on behalf of the scheme members and the employers and employees National Insurance contributions will reduce.

The way this works depends on when the pension was set up – the rules have changed for schemes established after 5 April 1997 following the Pensions Act 1995. The rules are also different for money purchase or final salary schemes.

If you would like to know more about this and how these rules affect your pension, please complete our Quick Enquiry Form and we will arrange for an expert to get in touch with you.