Contracting Out

In addition to the basic state pension, most people are eligible for the additional state pension formally known as the State Earnings-Related Pension Scheme (SERPS) before it was reformed in April 2002.

The second state pension is based on your earnings and how much Class 1 National Insurance you have paid.

If you decide to take out a personal pension scheme you have the option to contract out of the additional state pension. By contacting out, the government will then make a contribution into your personal pension scheme on your behalf in place of the additional state pension.

The amount that the government will contribute, known as the minimum contribution will vary from person or person. It is a rebate of some of the National Insurance you have paid and includes income tax relief on your rebate.

The contracting out of the additional state pension must be approved by the Department of work and the Inland Revenue.

If you are considering contracting out from the additional state pension it is worth seeking professional advice to find out whether this is the best option for you as there are a number of factors that will need to be considered – your age and the size of pension contributions being the main ones.

In some cases it may be more beneficial to continue with the state system.