Contracting Out

Since the government introduced Additional State Pensions in 1978 we have had the option to opt out and have more say over how our money is invested for our future.  This is called contracting out.  A percentage of our National Insurance contributions are put towards our Additional State Pension and until April 2012 we can choose whether we want the government to look after this and pay us an additional pension on top of our basic state one, or whether we would rather choose where to invest the money ourselves, through our own, non-government pension schemes.

Until 2012

There has always been, and until 2012, will be the option to contract out of your Additional State Pension.  This means you will not build up any Additional State Pension whilst you are contracting out, but that you and your employer will either pay preferential National Insurance contributions, allowing you to contribute more to your company pension or, in the case of personal and Stakeholder pensions, the government will pay a contribution or National Insurance Rebate into your pension fund.

Professional Help

Someone will contract out of the Additional State Pension if they have a personal, company or Stakeholder pension and feel that the increased contributions made to this pension as a result of either paying lower National Insurance contributions, or receiving direct government contributions to their own pension pot will benefit them more than the Additional State Pension in retirement.  Because of the vast variety of pension schemes, how they invest your money in the meantime until you wish to draw on your pension, and the volatility of the annuity rate market, this is not a decision to be taken lightly and professional help should be sought.

General Rule

As a general rule low earners and older people are better leaving their money with the government as this will benefit them better when they retire, while those who earn more and are younger may find having the money invested in their own personal pension funds will benefit them more, especially as the government plans to pay a flat rate Additional State Pension by 2030, regardless of earnings.  That being said, from 1997 the government has paid a higher National Insurance Rebate to older people, and less to younger people.

Political Volatility

One must also consider political volatility, balancing investment risks and the assumption the government will continue to pay a second State Pension and in what form.  For someone not due to draw on their pension for 40 years a lot can change.

From April 2012 the option to contract out will be abolished, simplifying the process and making it easier to understand.  Those already contracting out will be able to continue to do so.

This table compares four saving products that can help you to save more for your retirement. We have chosen products that can bring you extra money in the future. Which one to choose from, it will depend on the type of investment you want.

Provider	Product	Advantages	Disadvantages	More Info
	MoneyBuilder	• Tax free end cash pay-out • Monthly contribution starts at only £10 • Life cover included	• 15 years plan • Early “cash in” is not an option as you will lose too much
	Stocks&Shares ISA	• Returns free of Income and Capital Gains Tax under ISA rules • Monthly contribution from £30 • No restrictions on the amount of time you keep the money invested • You can transfer the ISA	• £10,680 maximum contribution in one year • It isn’t risk free
	Cash ISA	• Good online support and advising • You can transfer the ISA • They won’t charge for withdraws • You know what savings rates to expect • Tax free interest	• £5,340 maximum contribution in one year
	3 year Fixed Rate ISA	• Fixed rate, risk free • You can transfer the ISA • Tax free interest	• £5,340 maximum contribution in one year • Limited to 3 years

More Information on State Pensions

Additional State Pension

Voluntary National Insurance Contributions

State Pension for the Self Employed

Deferring your State Pension

What happens when you die?

Contracting Out

State Pension – FAQ