Briefing Notes

Briefing Note 12 - Could contracting-out be abolished?

Everybody in work, aged below state pension age and earning above the Lower Earnings Limit (LEL) is entitled to state second pensions, or S2P (formerly SERPS). However, individuals can ‘contract-out’ of S2P into a private pension. This means that they give up entitlement to S2P, but in return they pay lower National Insurance Contributions (NICs) if they have an occupational pension, or have some of their NICs paid into a personal pension. Many state pension reform options propose simplifying the system by abolishing contracting-out of the state second pension (S2P).

This Briefing Note looks at who would be affected by the abolition of contracting-out, and how. It finds that a minority of people would be directly affected by abolition. Contracted-out personal pension funds and Defined Benefit occupational pension schemes would be more significantly affected; their response is unclear.