Glossary · UK

What is Contracting Out?

A historic arrangement where employees left part of the state pension in exchange for paying lower National Insurance and building benefits in a workplace scheme instead.

Full Definition

Contracting out was a system, now abolished, under which employees could opt out of the State Earnings-Related Pension Scheme (SERPS) and later the State Second Pension, building up an equivalent pension through a contracted-out workplace or personal scheme instead. In return, both employee and employer paid a lower rate of National Insurance, or part of the contributions was rebated into the private scheme. It ended on 6 April 2016 when the new single-tier State Pension began, because that flat-rate system left no additional state element to contract out of. Periods of contracting out still matter today: they create a 'Contracted-Out Pension Equivalent' deduction that can reduce your new State Pension below the full amount (GBP 241.30 per week, around GBP 12,548 a year for 2026/27). You can check your forecast on gov.uk and may be able to fill gaps with voluntary Class 3 contributions (GBP 18.40 per week for 2026/27).