20/09/2025
Contracting out - what was it and how did it affect the state pension?
We are getting several posts from members about contracting out that we, as Admin, felt it could be useful to do a separate post to explain it.
* So what was it?
Well basically it was introduced in 1978 with the introduction of the earnings related pension scheme called SERPS. This allowed people to build up additional pension which was earnings related so the more you earned, the more state pension you received. This was to be added to the old Basic State Pension which is currently £176.45pw. SERPS changed to S2P (State 2nd Pension) in 2002 and continued till abolished in 2016 when a new system began.
However, as per the screenshot at the top of this post, many people were already in Defined Benefit occupational pensions which were earnings related. These were usually called final salary schemes. It was felt that it was unfair for those people to basically pay twice for the same benefits, once via the NI system and once via their occupational pension. These final salary schemes were used in the Public Sector - ie NHS, Teachers, Police, Local Government, Civil Service etc plus many of the big private sector companies.
So employers were allowed to contract out of the state system of Additional Pension in return for certain guarantees as per the screenshot.
What it’s important to note is that this only meant that you didn’t build up Additional earnings related pension. Your qualification for the Basic State Pension was not affected and that still retained its original rules of 39 years for women and 44 years for men to receive a full BSP. That was later changed to 30 years for both in April 2010.
* So fast forward to today and we have people saying they didn’t know or they didn’t agree to it. Why?
When people joined a contracted out scheme, they automatically were contracted out as there was no option. You agreed by joining the scheme.
All schemes had to inform members about contracting out and it would have to be written in the scheme booklet by law.
So why are people saying they didn’t know? If you’re honest with yourself, how many people really took notice of what they signed up to in their 20s and if they did, do they really remember 40 odd years ago? I know I didn’t. I just joined my scheme as it was a good thing to do so and I’m very grateful for it now.
* So why am I getting less state pension now if it didn’t affect the Basic State Pension?
The simple answer is that you’re not but it does require further explanation.
A new system was introduced in April 2016 that did away with the earnings related pension system. Eventually everyone will receive exactly the same flat-rate pension so long as they have the appropriate number of NI years.
At the moment though we’re in a transitional phase as we move from the old system to the new system. As part of the transitional arrangements it was decided that no-one would lose out from the changes. So they did two calculations to make sure that didn’t happen and it’s all explained in my Featured Post called Starting Amount. This is a link to that post.
https://m.facebook.com/groups/564527223636908/permalink/24318027194526911/?
Those who contracted out and had at least 30 years pre 2016 would receive no less than the full Basic State Pension that they had always been promised so at least £176.45pw. Unfortunately many people just assumed that they’d also get a full new state pension so are now surprised, or shocked, to realise that a deduction is made for their contracted out period even though this always happened pre 2016 but was just shown in a different way.
In reality though, those who contracted out really should be pleased that they’re now getting more than they were always meant to get - ie the old BSP. For every year from 2016 they have been able to improve their pension either by continuing to work and paying NI, by receiving NI Credits or by paying voluntary NI. Many who contracted out have now been able to get a full new state pension which they never could have got before. If you have at least 30 years pre 2016 and 9 years from 2016 then you cannot fail to receive a full new state pension even though you’ve been contracted out.
We often say on this group that those who contracted out are winners and they certainly are. They have a higher state pension, in many cases now a full pension, plus their contracted out pension which was always making up their given up additional pension.
Please try to understand what we’re saying rather than looking on it as losing something which isn’t the case.
For those who really want to know more I’d suggest reading this but it is quite lengthy.
https://www.lcp.com/media/1150050/why-is-money-being-deducted-from-my-state-pension.pdf
We hope this helps and are happy to answer any questions.
