Were you in employment before 2016? If you were, your employers might have decided to contract out a portion of your NI contributions. This portion would have counted towards your entitlement to the old Additional State Pension, but through the contracting out procedure, would, instead have been diverted towards building up your occupational or private pension. Additional pension is also referred to as Graduated Retirement Benefit, State Second Pension, or SERPS (State Earnings Related Pension Scheme).
In this Moneyfarm blog, we examine the basics of the contracted out pension process and how much your state pension is if you were contracted out.
What was the contracted-out pension system?
Contracted-out pension schemes were basically a system introduced by the UK government allowing individuals to use their National Insurance contributions to build a potentially more advantageous private pension. Contracting out worked slightly different depending on the type of private pension involved, whether it was a defined benefit or defined contribution pension.
If your contributions were diverted into a defined benefits pension, the scheme had to provide you with a ‘Guaranteed Minimum Pension’ (GMP), to reflect the additional pension you were relinquishing.
If on the other hand you were contracted out to a defined contribution scheme, the contributions go into a pension pot that you can access at age 55 (changing to 57 in 2028). Rather than having a guaranteed amount when you retire as with a defined benefit, with a defined contribution pension, the size of the pension pot on retirement is dependent on how the investment performed across the interim period.
The history of the “contracted out” process
The old Basic State Pension was a two-tier system – the Basic State Pension itself, and the Additional State Pension (ASP), which was earnings related. You were eligible for ASP if you were male and were born before 6 April 1951, or female and born 6 April 1953.
The Additional State Pension (ADP) was an extra amount of money you were entitled to based on your NI contributions. How much it amounted to was dependent on your earnings and whether you were paid certain benefits. ADP increased annually, with its percentage growth being related to the Consumers’ Price Index. It was an automatic process, unless you were contracted out.
Contracting out, diverted ADP NI contributions elsewhere, normally to an occupational or private pension scheme, like the Moneyfarm pension. The total money diverted is known as the COPE amount, the initials standing for ‘Contracted Out Pension Equivalent’. The exact amount of money involved depended on the type of pension into which the money was diverted or contracted out.
Due to its complex nature, the old two-tier system was replaced on April 6, 2016, by the New State Pension, whose calculation is based on your NI contributions record alone.
How the contracted-out pension process affects your State Pension
During the rationalisation leading up to the introduction of the New State Pension, the government decided it wouldn’t be right to pretend that contracting-out just happened as that would have been unfair to those who weren’t contracted out, as they would have paid their full NI contributions. So, in 2016, it was decided that a one-off deduction would be taken in respect of previous contracting out. This is the ‘COPE’ amount mentioned earlier.
If you’re asking yourself, “Will I get full state pension if I contracted out of SERPS, (the State Earnings Related Pension Scheme), the good news is that any NI contributions from the 2016/2017 tax year should have been added to your New State Pension using a rate of 1/35th of the full flat rate. The bad news is that some people, those on the old Basic State Pension system, will get less.
It was envisaged, however, that the transition to a private pension would result in increased gains which would offset any loss in State Pension..
No need to calculate your contracted out pension amount
Calculating a contracted-out pension amount is a complex procedure, and you won’t easily find a contracted-out State Pension calculator on the Web. Because of that, State Pension forecasts now include the diverted amount, which is clearly designated as the COPE’ amount referred to earlier.
The impact of contracted out pension contributions on your retirement planning
Utilising contracted out NI pension contributions in the best way possible can significantly impact favourably on your pension pot. A well-managed pension fund will make best use of prevailing stock market conditions, and through the action of compound interest applied year on year, will grow exponentially, helping to provide you with the lifestyle in retirement towards which you aspire.
How to check if you were contracted out of SERPS
If you are not sure and you want to find out whether or not you were contracted out of SERPS, you can check with your pension provider. Another way of finding out is to check your old payslips. Have a look at the line relating to your NI contribution. If you can spot the letters ‘D’, ‘E’, ‘L’, ‘N’, or ‘O’, it means you were contracted out. If you weren’t, and you paid the full contribution, you’ll see the letter ‘A’.
How do I find my contracted-out pension?
If you have lost track of or forgotten about a workplace pension into which you contracted out, there are two ways you can go about identifying and recovering the information you seek. The first is to get in touch with the employer that set the workplace pension up for you. If that isn’t an option, you can use the government’s ‘find pension contact details’ service.
Once you’ve found any lost or forgotten pensions, you have the option to transfer a pension that is underperforming. Consolidating our pensions in this way will make them easier to track and manage.
Frequently Asked Questions
What is the difference between contracted out and contracted in pensions?
A contracted-out pension is one that provides certain benefits in place of the State Second Pension by diverting a proportion of your NI contributions. Contracting out was replaced in 2026 by the New State Pension. Contracted-in pensions are those that provide benefits in addition to SERPS or the Additional State Pension, and into which, diverted NI contributions are sent. They include occupational pensions, SIPPs and stakeholder pensions.
Can I increase my State Pension if I was contracted out? If you were contracted out of SERPS for any length of time, you will almost certainly require more qualifying years of NI contributions in order to get the most from your State Pension. You could find that it is worth making Voluntary National Insurance Contributions (VNICs). You can buy VNICs to cover any gaps in the last six years, but if you hurry, before April 2025, you can buy VNICs to cover up to 19 years’ worth of gaps, going back as far back as 2006.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
