Contracting out of state second pension (S2P) Contracting out in the the 1980s

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People contracted out as they thought it would give greater benefits when retired

In 1988, the government allowed people with a personal pension to contract out from additional state pension,  rather than just those who belonged to an employer's scheme. By 1992, more than five million people had left SERPS for a personal pension.

Why did so many people contract out?

It was taken as given in the late 1980s that anyone in their 20s or 30s would benefit financially if they contracted out. There was an added incentive too. For the first five years of the scheme, the government paid in an extra 2% of your earnings into your personal pension if you were contracting out for the first time.

What went wrong with contracting out?

By 2005, it was clear that contracting out in a defined contribution (DC) scheme was more risky than people had thought. Which? research that year showed 71% of people were likely to lose out as a result of being contracted out. On average, those contracted out would receive just 80% of the pension they'd have got if they'd stayed with the state scheme.  

If you were around 35 or over when you contracted out, the picture is even less optimistic. Another group affected are those who stayed contracted out after 1997. This year is important because it's when the government's incentives stopped and the rebates became 'neutral'.

Personal pensions failed to live up to the early optimistic predictions for various reasons. High policy charges, coupled with poor investment performance, have eaten into the value of these investments. 

People contracted back in from 2012 onward and qualifying for the state pension after April 2016, will have the opportunity to offset contracting out if they continue to work and pay full National Insurance contributions.

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Last updated:

April 2016

Updated by:

Paul Davies


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