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Additional State Pension: ‘Contracting Out’ Stops in April/ 23.2.2012• A. Velasco• Posted At 12:00 PM

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Millions of workers are set to be affected by changes to the state pension starting this April. The government has estimated that around 23 million people will benefit from the new reforms, though higher earners will typically see less at retirement.

No more rebates

One of the biggest changes to the state pension concern the additional state pension, which are a series of top-ups that the government pays in addition to the basic state pension wage of £102.15. The people who will be affected by these changes are those who have chosen to “contract out” of the additional state pension. Instead of getting these state pension top-ups to their income at retirement, these people have chosen to have some of their National Insurance contributions deposited into a personal or workplace pension.

The rebate can be worth up to £2,200 a year, but the amount varies from person to person based on how far they are from retirement and their wages. From 6 April, people will no longer be allowed to opt out of the additional state pension, meaning that they will no longer receive extra Treasury funds into their pension. Any money that has already been received in previous years is safe, but workers will not see any more.

More changes

The changes mean that from 6 April, everyone who has reached the state pension age will get £1.70 a week on top of their state pension. The move could be good for the millions of people that it affects, since contracting out puts the foregone additional state pension money at the mercy of the stock markets.


Other reforms set to take effect this April may not be so beneficial, however. Currently, people who have contracted out of the additional state pension and buy an annuity with their retirement funds are offered a joint annuity. This ensures that the spouse of the annuity holder still gets payments even after they die.

The changes taking place on 6 April will make it so that married savers will be offered a single-life annuity instead. Already, a majority of men choose this option because it appears to be a better offer, but single-life annuities mean that payments stop as soon as the policy holder dies. This can leave spouses of the family’s main breadwinner in poverty, should they die.

Luckily, the changes on 6 April do not affect the Open Market Option, which allows people to buy any annuity that they find suits them best.

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