State Pension and Contracting Out

This page refers to the position prior to 1 April 2016

Changes to National Insurance for pension scheme members

The current State Pension is made up of two parts: the basic State Pension and the additional State Pension (the additional State Pension is sometimes called State Second Pension or SERPS).

The University’s employees’ pension schemes are currently ‘contracted-out’ of the additional State Pension. This means you pay National Insurance at a lower rate and build up pension in the contracted-out schemes (i.e. USS, OSPS, NHS Pension Scheme, SAUL and MRC Pension Scheme) rather than the additional State Pension. 

From 6 April 2016, there will be a new State Pension for people reaching State Pension age on or after this date which will no longer have two parts. When the new State Pension is introduced it will replace the existing basic and additional State Pension, ending the option of contracting-out (of the additional State Pension) and the lower National Insurance rate you currently pay.

What amount of State Pension will I receive?

The full rate of the new State Pension is estimated to start at about £151 a week (the actual amount has yet to be announced).  Currently the full rate basic State Pension is £115.95 a week.  However, not all individuals will receive the full amount of the new State Pension straight away. Your entitlement will be calculated in April 2016 as the greater of:

  • what you have earned to date under the current State Pension system (basic State Pension and any Additional State Pension whilst not in the contracted-out scheme), and
  • your entitlement based on the new State Pension rules; this will include a deduction to reflect the period during which you earned benefits in the contracted-out pension scheme rather than in the Additional State Pension scheme.

If your entitlement, calculated as above, is less than the new flat rate State Pension you will build up additional State Pension if you continue working and paying National Insurance contributions.

Members of contracted-out schemes who have been paying reduced-rate National Insurance contributions might find they are not entitled to the full amount of the new State Pension but will still receive an amount equivalent to what they would have received under the existing scheme.  Additionally it is possible to opt to pay voluntary National Insurance contributions if you have gaps in your National Insurance record in order have enough qualifying years to get the full State Pension.

If you’re aged 50 or over you can also now get a personalised State Pension statement based on your work history and National Insurance contributions to date. The statements will include information on deductions applied in respect of periods of contracted-out employment.

You can find out more on how the new State Pension will work and how you’ll be affected at New State Pension.

Your increased National Insurance contributions

From 6 April 2016 the rate of National Insurance you pay will increase from 10.6% to the standard rate of 12%. Although you’ll pay more in National Insurance contributions, you’re likely to get a bigger State Pension as a result of the changes. Based on current rates of National Insurance (which may change), the table below illustrates examples of the annual and the monthly change in your pay.

Impact to your pay

Annual Gross Pay Annual National Insurance Increase ( from April 2016) Monthly National Insurance Increase ( from April 2016)
£8,064 £0.00 £0.00
£10,000 £48.55 £4.05
£15,000 £113.65 £9.47
£18,000 £152.71 £12.73
£20,000 £178.75 £14.90
£22,000 £204.79 £17.07
£25,000 £243.85 £20.32
£30,000 £308.95 £25.75
£35,000 £374.05 £31.17
£40,000 £439.15 £36.60
£45,000+ £478.92 £39.91

Your State Pension age

You’ve probably heard about how the government is increasing the state pension age. You can use the State Pension age calculator to work out when your state pension will become payable Calculate State Pension.

Where can I find out more?

As part of the drive to help explain State Pension reform, the DWP have published information entitled “8 things you need to know about pensions”. This contains links to the State Pension tools.