The term contracting out refers to an option that existed in the UK pension system before 6 April 2016.
It is one of the most complex factors affecting the calculation of the current State Pension, particularly for those who reached State Pension age on or after that date, when the New State Pension was introduced.
If you were contracted out of the Additional State Pension, which included the State Earnings Related Pension Scheme, or SERPS, and later the State Second Pension, you did not contribute to that part of the state system for a period of your working life.
The consequence is that an amount is typically deducted from your New State Pension, meaning you may not receive the full weekly amount.
This deduction is made because, during the years you were contracted out, you either paid lower National Insurance (or NI) contributions or some of your NI contributions were redirected into a private or workplace pension scheme instead.
What was Contracting Out of SERPS?
Contracting out was a deal where the government effectively allowed you and your employer to invest a portion of the NI that would normally go to the Additional State Pension into a separate private or workplace pension.
- Additional State Pension (SERPS/S2P): The old State Pension system before 2016 had two parts: the Basic State Pension (a flat rate) and the Additional State Pension (an earnings-related top-up, known first as SERPS and later as S2P).
- The Deal: If you were contracted out, you and your employer benefited from a rebate on your NI contributions. In return, your separate pension scheme was responsible for paying you a Guaranteed Minimum Pension, or GMP, which was intended to replace the Additional State Pension you had given up.
- Abolition: Contracting out ended completely on 5 April 2016, and all employees now pay the standard rate of National Insurance contributions.
How to Find Out If You Were Contracted Out
For many, the decision to contract out was made by their employer or pension scheme, so you may not remember if you did this.
There are several ways to check your past status.
- Check Old Payslips: If you have payslips from before 6 April 2016, look at the category letter for your National Insurance contributions. If the letter is D, E, L, N, or O, you were contracted out during that pay period. If the letter is A, you were contracted in.
- Ask Your Pension Provider: If you were a member of a workplace or personal pension scheme, contact the provider and ask them if the scheme was ever contracted out. Look at old pension paperwork for phrases like “contracted out rights” or “protected rights.”
- Check Your State Pension Forecast: You can check your State Pension forecast online through the official GOV.UK website. The forecast will show your calculated “starting amount” for the New State Pension and whether an amount has been taken off due to past contracting out.
How Does Contracting Out Affect the New State Pension?
If you were contracted out for any period before April 2016, it is highly likely that your starting amount for the New State Pension will be less than the full rate, currently £230.25 a week for 2025 to 2026.
- The Deduction: When the New State Pension was introduced, the DWP calculated a Contracted Out Deduction from your initial State Pension amount. This deduction broadly represents the value of the Additional State Pension that you gave up in exchange for the NI rebate and the Guaranteed Minimum Pension that your private pension scheme built up for you.
- The Trade Off: The DWP will not give you the full New State Pension and allow you to keep the extra money that was invested in your private pension. The deduction prevents you from being paid twice for the same period.
- COPE: Your private pension may refer to the Contracted Out Pension Equivalent, or COPE, which is an estimate of the additional State Pension that your private scheme was supposed to replace.
Can I Still Get the Full New State Pension If I Contracted Out?
Yes, in many cases, it is still possible to achieve the full New State Pension, even with a past contracting out deduction.
- Adding Qualifying Years: The New State Pension is based on having 35 qualifying years of NI contributions. Any years you work and pay NI after 5 April 2016 will add to your State Pension amount, at a rate of about £6.58 per week for each full year, up to the full weekly rate.
- Voluntary Contributions: If you have gaps in your NI record, you may be able to pay Voluntary National Insurance Contributions to build up extra qualifying years. This can increase your overall pension amount and help offset the initial deduction. It is important to contact the Future Pension Centre before making any voluntary contributions to ensure it is worthwhile.
