Glossary · UK
What is Contracted Out Pension?
Pension built up during a period when you or your employer contracted out of SERPS/S2P, paying lower National Insurance in exchange for benefits from an occupational or personal pension.
Full Definition
Contracting out refers to an arrangement (pre-April 2016) under which employees and their employers opted out of the State Earnings-Related Pension Scheme (SERPS) and, from 2002, its successor the State Second Pension (S2P). In exchange for paying reduced National Insurance contributions (or a rebate being paid into a personal pension), the contracted-out employer scheme or personal pension undertook to provide at least the Guaranteed Minimum Pension (GMP) or an equivalent protected rights fund. The benefit to the individual was potentially better pension growth via a private scheme; the risk was that the private scheme underperformed the state benefit foregone. Contracting-out was abolished for defined benefit schemes in April 1997 (on a GMP basis) and for defined contribution (money purchase) schemes in April 2012. All contracting-out ended in April 2016 when the new flat-rate State Pension replaced the old two-tier system. If you were contracted out for some or all of your working life, your State Pension forecast from the government gateway may show a "contracted-out deduction," reflecting the SERPS/S2P you opted out of. This deduction can mean your new State Pension is below the full £241.30 per week (2026/27) even with 35+ qualifying years.