Reduced National Insurance if contracted out of State Second Pension

If you join an occupational pension scheme or have a stakeholder or personal pension plan you may be able to 'contract out' of the State Second Pension. If you do, you'll either pay reduced National Insurance contributions or you'll get a rebate of the National Insurance contributions you've paid.

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Contracting out of the State Second Pension

The State Second Pension, sometimes called the additional State Pension, is paid on top of the basic State Pension.

If you're an employee you'll be entitled to receive the State Second Pension if you pay full-rate National Insurance contributions. If your earnings are between the 'lower earnings limit' (£111 a week for 2014 to 2015 tax year) and the 'primary threshold' (£153 a week for 2014 to 2015 tax year) they'll normally count towards the State Second Pension even if you don't pay any contributions.

You can 'contract out' of the State Second Pension if you either:

  • join your employer's contracted-out occupational pension scheme
  • have an appropriate stakeholder or personal pension scheme

If you contract out of the State Second Pension you'll lose some or all of your entitlement to it. Instead you will receive your pension from your pension scheme.

Understanding the additional State Pension (Opens new window)

Understanding occupational (company/workplace) and personal pensions (Opens new window)

Check the National Insurance rates

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Your National Insurance contributions if you contract out of the State Second Pension

If you contract out of the State Second Pension you'll be entitled to National Insurance contributions rebates. These are paid into your pension scheme to compensate for the State Second Pension you've given up.

If you contract out and pay into an occupational pension scheme

If you contract out because you're a member of your employer's occupational pension scheme:

  • you and your employer will pay reduced National Insurance contributions
  • your employer will pay at least the amount saved in contributions into the scheme
  • HM Revenue & Customs (HMRC) will pay an additional rebate into the scheme based on your age and your earnings if your scheme is a 'contracted-out money purchase scheme'

A contracted-out money purchase scheme is one where your pension depends on how much has been paid in and on the value of your fund when you retire.

You'll pay a reduced National Insurance contributions rate on your earnings up to the 'upper accrual point'. This is 10.6% instead of the standard rate of 12% (2014 to 2015 tax year rates).

Check the National Insurance rates

Understanding occupational (company/workplace) and personal pensions (Opens new window)

If you contract out and pay into a personal pension scheme

If you contract out because you have an appropriate stakeholder or personal pension scheme you'll keep paying full-rate National Insurance contributions. At the end of the tax year HMRC will pay 'minimum contributions' into the scheme. The minimum contributions are the difference between the contracted-out and non contracted-out rates, plus a rebate based on your age and your earnings.

At the same time, HMRC will also pay the tax relief you're entitled to into the scheme.

The annual statement your pension provider sends you will show the amount of minimum contributions HMRC has paid into your pension scheme.

You can follow the first link below to find out more about minimum contributions including how they're worked out.

Download the HMRC guide CA17, 'Employee's guide to Minimum Contributions' (PDF 224K)

Personal pensions - learn more (Opens new window)

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Your National Insurance contributions if you don't contract out of the State Second Pension

If you choose not to contract out you'll pay National Insurance contributions in the usual way. You won't be entitled to any rebates but you will build up your entitlement to the State Second Pension.

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Changes to contracting out from April 2012

From 6 April 2012, you're not able to contract out of the State Second Pension by joining:

  • a personal or stakeholder pension scheme
  • a contracted-out money purchase ('defined contribution') occupational pension scheme

Find out more about contracting out by following the link below.
If you've contracted out into a final salary occupational pension scheme you'll not be affected by the changes.

Contracting out of the Additional State Pension (Opens new window)

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Where to get more help

If you want more information about your pension and contracting out you should first contact the scheme provider or speak to an independent financial adviser.

You can write to HMRC at:

HMRC National Insurance contributions and Employer Office
Services to Pensions Industry (Personal Pensions)
Benton Park View
Newcastle upon Tyne
NE98 1ZZ

You can also call the HMRC Contracted-out Pensions Helpline or The Pensions Advisory Service by following the links below.

Contracted-out Pensions Helpline

Pensions Advisory Service (Opens new window)

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More useful links

National Insurance - the basics

Tax and National Insurance for the employed

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