Pension Planning - Opting Out of the State Pension (Contracting Out)

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Opting Out of the State Pension (Contracting Out)

Individuals are able to opt out of a state pension scheme, this is known as contracting out. These people must then rely totally on their private pension for income.

You are able to contract out of both S2P and SERPS.

By contracting out of the state scheme, the state will save money as it will have to pay you less pension, and in return the National Insurance contributions are refunded to you. The way in which this reimbursement is returned is dependent on the way in which you contract out.

• If you have been contracted out because you are part of a pension scheme run by an employer, you receive the rebate as a reduction in the rate of National Insurance you pay.
  
• If you contract out through a personal pension, or a personal stakeholder pension scheme, the standard National Insurance rate must be paid, but part of these contributions are returned and paid directly into your pension scheme.

There is no guarantee that the state pension that you give up will be less than the pension you will receive from the private scheme. Also, there are no rules as to who maybe better off contracting out as this can depend on a number of factors including your earnings and the type of scheme that you belong to.

Generally if you are 50 or older, or if your earning £15,000 or less, then you may be better off not contracting out of a state pension.

However if you have already contracted out through a personal pension, it may be best to remain with the current arrangement due to the heavy charges for stopping

It is usually beneficial to join a pension scheme run by your employer, whether or not it is contracted out, because these schemes have many advantages that compensate any gains or losses from contracting out. However it is very important that you get advice about the contracting out position, from the occupational pension scheme administrator, or an independent financial advisor.