Provided by Holborn Financial Ltd Independent Financial Advisor

Frequently Asked Questions

What does “contracting out” mean?
Contracting out was when you chose to give up your right to the state second pension (S2P) which is the earnings related pension. Instead the government paid some of your National Insurance (NI) contributions (known as rebates) and income tax into a separate pension plan. These contributions are referred to as protected rights.
Can I decide to contract back into the S2P?
No, funds accrued in private schemes cannot be repatriated back into the State system.
Can I then decide to contract out again?
No, the Government removed this option in 2012.
Can I contract in for past years?
No, you cannot contract back in for past years during which you were contracted out.
Now that I have rejoined the S2P what happens to my previous contracted out contributions (rebates) that were paid into my pension plan?
This money stays invested.
Are there any changes I should know about?
Yes, contracting out is no longer allowed from 2012 and the state pension age may increase to 68 by 2046.
What are the main differences between contracting out compared to S2P?

Contracting out provides you with more flexibility including:

  • When you can take the benefits.
  • The ability to take 25% of your fund as tax-free cash.
  • If you die before you take your benefits and you don’t have a qualifying dependent, your contracted out fund can be left as part of your estate
  • More choice in the form of the annuity you can buy (single or joint life for instance)
Now that I have rejoined the S2P, what guarantees are there that the government will pay me an S2P when I retire?
There’s no guarantee. A future government could change the rules relating to S2P so that you actually receive more or less than you were expecting under the current rules.
What guarantees are there that my private pension will be as good as the S2P?
There are no guarantees. You may get back less than you would have if you had stayed in the S2P. This could happen for two reasons, either the investments you buy with your rebates may not return as much as you need to replace your S2P pension or annuity rates may be expensive when you retire, which could mean that the fund you’ve built up will not be enough to buy you an annuity which will provide as much income as your S2P pension. Of course the upside is that you may be able to buy more than the S2P.
Does contracting out affect my entitlement to the basic state pension?
No, it only affects your entitlement to S2P.

If you are worried about your position, or want advice, contact us.