What is contracting out?

The Government provide two different kinds of state pension. There's the Basic State Pension and the State Second Pension (S2P).

Contracting out is when you decide to opt out of S2P. So instead of building up a pension in S2P the Government makes payments, known as rebates, to your private pension. The Government makes these payments each year to replace the amount of State Second Pension which would have been built up for that year. The pension fund built up from these payments is known as Protected Rights.

You can then use this Protected Rights fund to buy a pension between age 50 (increasing to age 55 from 6 April 2010) and 75.

The value of your investments can fall as well as rise, and you may get back less than is paid in.

You should seek financial advice before you make a decision on whether or not contracting out is best for you. Financial advisers may charge for their services.

Tax and legislation are likely to change in the future. The information given here is based on our current understanding of law and HM Revenue & Customs practice. Tax relief may alter and its value depends on your financial circumstances.