confused about contracted out pensions?

johannis

hi, my wife and i are begining to think about getting pensions into line and are getting easily confused, can you help?
We have checked our state pension on the Govt Gateway and our forecast states we will get our full entitlement, but further down it states that for some years our pension was contracted out which might lead to a reduction in pension. which is correct?
When you look at the indiviual years it doesnt indicate exactly when this happened. we both started working in 92 and every year since then shows as full year on both NI records.
so, do we need to be concerned that we me may have been contracted out or not?

dunstonh

We have checked our state pension on the Govt Gateway and our forecast states we will get our full entitlement, but further down it states that for some years our pension was contracted out which might lead to a reduction in pension. which is correct?

Contracting out can result in you getting less NSP but not always.

The key bit to look for on that projection if you have just one figure mentioned is 
£xxx is the most you can get
You cannot improve your forecast any more.

The figure it shows will not be reduced from contracting out. 

If yours shows two figures, it means you haven't fully qualified yet and are still building entitlement.  It will go onto saying £xxx is the most you can get.

so, do we need to be concerned that we me may have been contracted out or not?

Its not something to be concerned about.   Most people are financially better off from contracting out.  You should be able to tell if you contracted out from your pensions.
e.g. if you were in a defined benefit pension.  These were contracted out.   Some occupational defined contribution pensions were contracted out.   Or if you contracted out using a personal pension.  

Contracting in was the default.  You only contracted out if there was a pension that was contracted out.   So, look at the pensions you have.

Secret2ndAccount

The deduction for contracting out did, at one time, affect your pension. However, every year of NI that you pay adds about £6 to your pension, until you hit the magic number £221.20   After that, you can't build up any more. You have paid sufficient years of NI that the deduction no longer has any effect. You will get the full £221.20   If you had retired, or ceased paying NI some years ago, maybe you would have had a lower pension as a result of the deduction.

Further Explanation – if you care

Your National Insurance contribution has always been somewhat in proportion to your salary. The more you earn, the more NI you pay. In the past there were various schemes where you could opt to pay a bit less NI, and divert the money into an alternative pension – often your employer’s pension scheme. Less NI meant you built up a smaller State Pension, but you knew you would get something extra from the alternative pension, so all was okay.

In 2016, the government decided to do away with Contracting Out. Your NI would be based on your salary whether you made payments into another scheme or not. They also increased the maximum value of a full, basic State Pension, but increased the number of years of contributions it took to get there – a complete reset of the rules.

For each individual, they calculated two numbers:

1.      How much State Pension you had accrued so far under the old rules

2.      How much you would have accrued had the new rules been in place for a long time

Whichever was the larger number of the two became your new starting point in 2016.

Since 2016, each full year of NI contribs increases your pension by £6.32 (2023/24 number) or £6.58 (24/25 number) until you reach the maximum. The max is £221.20 (23/24) or £230.25 (24/25) at that point, additional years don’t get you any more state pension.

For anybody who has reached their upper limit, it does not matter if they were contracted out or not. For those who have not reached their limit, it is possible that contracting out is why they need more years, or can’t get to the full amount. In all cases, the numbers in green on your pension forecast are the amounts you will receive; any reduction for contracting out has already been calculated into the numbers.

Marcon

Secret2ndAccount said:

The deduction for contracting out did, at one time, affect your pension. However, every year of NI that you pay adds about £6 to your pension, until you hit the magic number £221.20   After that, you can't build up any more. You have paid sufficient years of NI that the deduction no longer has any effect. You will get the full £221.20   If you had retired, or ceased paying NI some years ago, maybe you would have had a lower pension as a result of the deduction.

Before someone speed reads and jumps to the wrong conclusion - that's £6 per week, not per year!

PaellaParaMi

Interesting.  My wife and I both checked our state pension forecast.  We are both mid 40's and our NI records both started at the same time.  I reach full entitlement next year however my wife requires 7 more years.  This totally baffled us but could it be the same scenario re contracted out as she is a teacher?

molerat

Teacher's pension was definitely contracted as were the majority of public service pensions.