Contracting out

Protected Rights have been freed.

What is contracting out?

This is the term used when you opt out of the State Second Pension. If you are an employee, you can do this if you join a contracted-out occupational pension scheme, a personal pension or stakeholder pension scheme.

When you contract out, the Government pays a rebate of your National Insurance Contributions into a pension as determined by the individual. The rebate consists of a refund of contributions already paid during each year, plus tax relief.

If you do decide to contract out, you will lose some or all of your entitlement to the State Second Pension. In general you only lose this for the time you are contracted out. It is important to note that the decision to contract out will not affect your entitlement to the basic State Pension.

In line with the 2007 Pensions Act, in nearly all cases, contracting out will be abolished in 2012. This Act also brings in a number of other changes to the State Pensions system. Generally, these changes will only affect individuals when they reach State Pension age on or after 6th April 2010.

What’s changed?

Protected Rights can be invested in the same way as non-Protected Rights: specifically they can be invested in a SIPP. SIPP administrators will have to keep separate accounts, however, from an investor’s perspective they will be able to manage protected rights as part of their total pension ‘pot’.

Previously Protected Rights had to be used to buy an annuity with a 50% Spouse’s Pension (if married) but, from 2012, there will be no restriction on the type of annuity purchased.