Contracting out

Currently, you do not have to join the second state pension scheme but you can ‘contract out’.  If you are a member of your company pension scheme then the scheme itself may well be contracted out, in which case both you and your employer will pay lower national insurance contributions.  You will not lose out when you retire, as an equivalent amount to the extra state pension you would have received will be provided by your company scheme.

You can also personally contract out and join a Stakeholder or other personal pension scheme, provided the scheme satisfies certain conditions (see Guide to Personal Pensions).

How can I tell if I will be entitled to a full state pension?

You can obtain a state pensions forecast and check whether or not you are on course to have paid enough contributions by completing Form BR19, obtainable from the Pensions Service on 0845 300 0168 or online at The Pension Service.

The closer you are to retirement the more accurate the forecast will be.  If you are many years away from retirement the forecast will assume that you will be working and making contributions in the intervening years. 

Can I make up a shortfall?

If you have ‘gaps’ in your national insurance record, because you lived abroad, for example, it is possible to pay voluntary contributions to protect your right to a full state pension.   Voluntary contributions (known as Class 3 contributions) are a flat weekly rate (£8.10 in 2008-09), and they must normally be paid by the end of the sixth year after the one in which they were due.

From April 2010 changes are planned that will reduce the number of qualifying years needed to obtain a full state pension to 30. So if you are due to retire after that date you should seek advice from the Pension Service as to whether or not you could benefit from making voluntary contributions. 

Are there any other ways to boost a state pension?

Most people will likely need to draw their state pension when they reach retirement age, but if you are still working, or you can afford to, you can defer taking your pension.  This will give you a higher amount when you do decide to retire. 

You can defer drawing your pension for a maximum of five years. By doing so you’d gain around an extra 7.5% for each year, so the full five years would give you approximately an additional 37%.  This can either be taken as a higher weekly pension or as a taxable lump sum when you finally retire.

You must defer your pension by at least seven weeks to gain any benefit at all, and once you have started to draw your pension, you can change your mind and opt for deferment, but only once.  You cannot keep chopping and changing.  

Any SERPS, S2P or Graduated Pension will also be increased by the same percentage.