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.
On this page:
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' (£109 a week for 2013-14 tax year) and the 'primary threshold' (£149 a week for 2013-14 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:
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.
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 because you're a member of your employer's occupational pension 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 per cent instead of the standard rate of 12 per cent (2013-14 tax year rates).
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.
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.
From 6 April 2012, you won't be able to contract out of the State Second Pension by joining:
Find out more about the changes, including what will happen if you're already paying into one of these schemes, 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.
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 Office
Services to Pensions Industry (Personal Pensions)
Benton Park View
Newcastle upon Tyne
You can also call the HMRC Contracted-out Pensions Helpline or The Pensions Advisory Service by following the links below.