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Has your pension been cut by thousands of pounds?

Individuals who were contracted in to the state second pension may have lost out on thousands of pounds.


by Michelle McGagh on Jan 24, 2013 at 15:54

Has your pension been cut by thousands of pounds?

Employees who 'contracted in' to the state second pension could have thousands of pounds wiped off their pension with the introduction of the single-tier state pension.

The government plans to introduce a flat-rate state of pension of £144-a-week in 2017 abolishing the complex old system, the most confusing part of which is the 'contracting out' rules. But not only is it confusing, it could also have cost pensioners a lot of money.

What is contracting out?

Contracting out is not easy to understand, but simply put, it allowed employees and employers to pay lower national insurance contributions (NICs) and redirect the money saved by these lower contributions into a workplace pension scheme.

By contracting out employees lost the right to claim the second state pension (S2P) – which under the old state pension scheme helped top up the basic state pension. The money that was redirected into a private scheme is known as ‘protected rights’.

Individuals had to decide whether they wanted to be contracted in or out, and make a decision on where they thought the money would be most beneficial.

Those who decided to keep paying NICs at the full rate and receive the S2P were ‘contracted in’.

All change for pensions

Contracting out was abolished in April 2012 and under the new basic state pension rules, which will see the introduction of a single-tier pension of £144-a-week, S2P will be abolished.

Contracting out was a popular policy, and 80% of people have contracted out of the S2P at some point in their working lives. But those that are contracted out will now be brought back into the state system and made to pay full NICs, the increase equivalent to 1.4% of relevant earnings.

Although those that will be contracted back in may begrudge paying the extra NICs, Aviva corporate benefits head of policy John Lawson, said those who remained contracted in throughout their working lives will be the ones to suffer with the introduction of the single-tier pension.

Those who contracted out are still able to build up their entitlement to the full state pension of £144 but are also allowed to keep their protected rights – the money that built up when they opted out – meaning they receive double payments.

But those who contracted in will only be entitled to the £144-a-week, although they can keep any benefits they have accrued over this amount.

For example; take a person who was contracted out and then contracted back in seven years ago. If they had already gained entitlement to the full state pension then any money accrued over that entitlement will be paid as extra benefit, but if the person had not reached the full entitlement seven years ago when they were contracted back in then they are only able to use the last seven years of NICs to build up to the £144-a-week, not a penny more.

Losing out

Lawson said the problem is that in the early 2000s, 12 years before the abolition of contracting out, regulatory pressure meant many pension schemes contracted savers back in automatically, and many of these will lose money.

He estimated that 2.5 million customers who had contracted out were then contracted back in following Financial Services Authority (FSA) advice that it would be in savers’ best interests.

Individuals who were contracted back in have lost on average, according to figures from the Association of British Insurers, £1,000 a year.

‘There are two million people who were contracted out and then back in by providers and they would have missed out on premiums of £2 billion a year which is £1,000 a year from their pension,’ he said.

‘A lot of people were contracted out seven years ago [following the FSA’s advice] so they could have missed out on seven years of £1,000.’

Right advice?

Lawson said that making a blanket decision to contract pension savers back in was the right thing to do at the time as the markets in the early 2000s ‘were in the pits’ and there was concern that poor performance meant savers were better off contributing to the S2P than not.

‘You can only give advice on what the world looks like at the time. The FSA and providers did what they thought was right at the time, although you can always look back and find fault,’ he said.

Lawson added that those who contracted in and those who were contracted out each had their reason to feel aggrieved, those who were contracted in because they may receive less and those who were contracted out because they will have to pay increased NICs.

‘We need to make sure that there are no big winners and no big losers, that [the flat rate state pension] is balanced and is based on give and take.’

15 comments so far. Why not have your say?


Jan 24, 2013 at 16:48

My Pensions Forecast says

Basic Pension £107

S2P £ 11

Total £118

I will not be eligible to receive State pension until 2024 & will have

35+ years NI contributions.

Will I therefore get the £144 (+ inflation) AND the £11 top up?

Confused !!

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The ssinnic

Jan 24, 2013 at 17:02

So if you contracted out and had rebates paid into your personal pension this reads as though not only will you get the £144 p.w. but also whatever you have been able to accumaulate via the c/out pp.And able to take 25% as tfc.

Now didn't I read soimewhere that ifas who advised contracting out were in trouble with the FSA and was there some legal problem?


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Jan 24, 2013 at 17:06

My retirement age is 2036. I have 19 qualifying years of NICs towards the state pension. I was contracted out for the past 2 years. Before that I was contracted in (17 years). For my 17 contracted in years I have built up a S2P entitlement of about £30/week according to my Pensoin Forecast. I can't work out if that is now lost with the latest pension changes. If it's the case that £144 is the maximum I can get, then what happens if I don't make 35 years NIC contributions (say I emigrate). If my contribution years only entitle me to, say, £114/week state pension, will the £30/week S2P I accrued be recognised as it doesn't exceed the £144 cap ? If anyone knows the answer, I'd be grateful to hear it.



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fair play11

Jan 24, 2013 at 17:16

Please explain Contracted out/in.

If I contracted out but paid the Class A NI rate. Where has the money gone?

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Jan 24, 2013 at 17:21

I have been contracted out most of my working life but obviously am now contracted in. I am 65 in 2017 as I understand it I will get the basic pension of

£107 plus a nominal sum for every year I have been contracted back in - I think I read it was about £3 per year. So I think I will get about £122 per week.

I could be totally wrong and will gladly accept if anybody corrects me

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Redundant (Old Timer?)

Jan 24, 2013 at 18:00

Fair Play11

Contracted in - all your NIC Class 1 contributions went to both the basic state pension and to S2P or its SERPS predecessor.

Contracted Out - you paid a Class 1 Conrtibution for the basic state pension only. The extra bit of the contribution could go in a number of directions:

a) You joined your employer's pension scheme and this part was used to give you "your protected rights" in the employer's pension scheme. This was fairly common and done by most employers providing a final salary pension scheme.

b) If you worked in the Civil Service then it went to provide the "protected rights bit of your pension.

c) Alternatively you were able to set up your own personal pension and contract out into that (provided your employer had not already contracted you out).

So the money was never lost, just sent to a different pension provider for you.

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Redundant (Old Timer?)

Jan 24, 2013 at 18:03


In same age and contracted out boat as you. Just done my forecast and unfortunately I arrive at a similar answer!

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Rob Walker

Jan 24, 2013 at 19:47

....And the government wants the average bloke to put more into his pension. This article and the comments that follow says everything about why there is no appetite to do this. It gives me a headache just trying to follow this stuff, and why should any new pension 'initiative' be any different?

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fair play11

Jan 24, 2013 at 20:07

Thanks folks for the info. Still in the fog. Always paid the full NI contribution, did pay into a private pension. Got the tax relief on that but cannot see the difference between Con In and Con out. If con out should I have paid a lesser NI rate? If I should have paid a lesser rate, where has the difference gone?

Friend "A" always paid NI contributions gets £107 per week. Self employed friend "B" did not pay NI contributions and gets pension credit of £140 per week. which of us is the biggest mug

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Roy Harding

Jan 24, 2013 at 21:16

This Q & A from the Telegraph makes more sense to me.

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Jan 27, 2013 at 01:27

Has your pension been cut by thousands?

In my case the answer is "yes" but not because of the proposals in the Pension Reform Bill.

My state Retirement Pension is reduced annually by virtue of not being index inked. This is simply and solely because of the country I live in. If I lived in the UK, EEA or a random select group including Serbia, Macedonia or the USA the increase is automatic each year. Those, however, who live, for example, in Australia, Canada or Thailand and contributed to the NI Scheme on the same terms and conditions as everyone else the pension is frozen.

No legal, moral financial or administrative justification for this discrimination - discrimination Pensions Minister Steve Webb vowed to end. He was in the Opposition then and the leopard changed his spots....

So sympathies to those trying to unravel this latest presentation. Even though you may be many years from retirement if you are thinking of emigrating it is something to bear in mind and, campaigning against this iniquitous policy is not governed by your age!

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George Morley

Jan 27, 2013 at 03:59

Pensions minister Steve Webb has recently said there was a “worry” that workers in some situations would not get the “best value” from pensions schemes where they were automatically enrolled..

He must have been thinking about the 'frozen pensioners' mentioned by RobtheFox because I am one of those. He is not alone because there are over 500,000 pensioners all in the same boat and they represent just 4% of all state pensioners worldwide.

Instead of fixing the existing pension structure and treating all pensioners fairly he introduces a new scheme and ignores the existing pensioners that he desperately wanted to treat the same as the other 96%, so what has changed then ? Oh,He said that when he was in opposition and now he is in the perfect position to do it he fails the pensioners and blames the economy which says that the recovery must be on the backs of pensioners in his view, so read the small print. You may find you have been done - we were but were never told while paying our dues.

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deeply realistic

Jan 28, 2013 at 09:21

Is there a pensions calculator anywhere on the web that allows one to put in the S2P contributions made (and when) so as to do the revised calculations? I need an "idiot's guide" as I'm just confused. And I have 2 Maths A levels...

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Anonymous 1 needed this 'off the record'

Jan 28, 2013 at 11:23

The blame for all this lies in the evil of the Pension Credit and the effect of auto-enrolment. Before auto-enrolment, people could choose to throw their money down the drain, saving £50,000 in a pension scheme only to find that they get exactly the same total pension as if they haven't saved a bean. Even the government could not force people to to this, so the Pension Credit had to go; hence the flat rate pension.

My sympathies lie with the poor saps who have been auto-enrolled but retire before the reforms kick in; they WILL have been forced to throw money down the drain.

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George Morley

Jan 28, 2013 at 14:50

'deeply realistic' don't feel bad because even Professor Steve Webb said that Einstein would have problems understanding the pensions system and he has just introduced this new one because he could not understand and fix the old one ! And this man is in charge, so there's little hope for anyone looking at retirement. He happily freezes the pensions of 520,000 pensioners who are frozen and receive no annual increases even though he said he would change that and so his word is not reliable either let alone your pension.

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