Contracting-out is when employees leave the additional State Pension (currently the State Second Pension; prior to April 2002 the State Earnings Related Pension Scheme (SERPS)) and join a contracted-out occupational pension or personal/stakeholder pension instead. They receive a pension from the scheme rather than the additional State Pension. To reflect this, they receive a rebate of National Insurance contributions.
If you run a contracted-out occupational pension scheme you will have been issued with a contracting-out certificate. If you are unsure you can contact the Pension Scheme Services (PSS) in Nottingham as all types of schemes should be registered.
If you operate a contracting-out occupational pension scheme there are two main rates of National Insurance payable - 'D' rate for salary related and 'F' rate for money purchase.
If you have employees in an Appropriate Personal Pension scheme then 'A' rate is applicable.
Appropriate Personal Pension and contracted-out money purchase rates will only be appropriate for tax years up to and including 2011-12. For further information see 'What are the changes to contracting-out from 6 April 2012'.
As above 'D' rate is a lower rate of National Insurance payable for members of a contracting-out salary related scheme. 'A' rate is the standard class of National Insurance payable for employees who are not-contracted out. Employees who pay 'A' rate but are contracting-out in an APP/APPSHP will receive a rebate of National Insurance paid directly to their pension provider, for tax years up to and including 2011-12.
Once a person reaches State Pension age (SPa) they are no longer liable to pay any National Insurance contributions (NICs). However if they continue to work you need to pay category 'C' rate NICs.
A person is liable to pay National Insurance contributions up until they reach SPa. You should continue to pay the contracted-out rate of National Insurance contributions.
If you do not currently operate an occupational pension scheme or contribute towards a Personal Pension for your employees you may have to provide access to a Stakeholder Pension scheme.
If you have five or more employees you have to provide access to a Stakeholder Pension scheme. Further information on Stakeholders is available from the Pensions Advisory Service (Opens new window).
If you operate a contracting-out money purchase stakeholder occupational pension scheme 'F' rate is applicable.
If you have employees in an Appropriate Personal Pension Stakeholder scheme then 'A' rate is applicable.
These rates are only applicable up to and including tax years 2011-12. For further information see 'What are the changes to contracting-out from 6 April 2012'.
You will need to contact your current employer's pension scheme administrator and find out if they are willing to accept the transfer of benefits into their scheme. You may also wish to seek independent financial advice.
For tax years prior to 2012-13 you should either contact you Pension Provider or you can complete a form CA1543 which can be downloaded from the HM Revenue & Customs internet site.
Alternatively, your Appropriate Personal pension will cease from 5 April 2012 and you will be automatically brought back into additional State Pension (State Second Pension). For further information see 'What are the changes to contracting-out from 6 April 2012'.
We cannot provide advice on whether or not someone should contract-out. You should receive information from your pension provider on an annual basis which you should review and take independent financial advice.
You need to contact Elections Section at PSS in Nottingham. They will let you know what you need to do to surrender your contracting-out certificate.
Once Elections Section have received the necessary documentation that the scheme is ceased they will notify Scheme Cessation in National Insurance Services to Pensions Industry. Scheme Cessation will send a list of members to the scheme administrator which will also include the options available. Full details can be found in leaflet CA15 - Cessation of Contracted-out Pension Schemes (PDF 1.6MB) or CA85 - Cessation of Stakeholder Pension Scheme Manual (PDF 297K).
From 6 April 2012, contracting-out of the additional State Pension (otherwise known as State Second Pension) will be abolished for certain kinds of pension. This means that from this date you won’t be able to contract-out of additional State Pension through:
If you're already paying into one of these schemes, you and your employer may be able to continue making contributions to it. However, HMRC will stop paying National Insurance contributions rebates into it. Instead, you will automatically be brought back into and will start to build up your entitlement to the additional State Pension.
If you've contracted out into a salary related occupational pension scheme you'll not be affected by the changes.