What Was Contracting Out?
Between 1978 and 2016, employees in the UK could be “contracted out” of the Additional State Pension (known at various times as the State Earnings-Related Pension Scheme, or SERPS, and later the State Second Pension, or S2P). Being contracted out meant that instead of building up Additional State Pension through higher NI contributions, you and your employer paid a lower rate of NI, and the difference was redirected into your workplace pension scheme.
The idea was straightforward: your workplace pension would provide benefits at least equivalent to what you would have received from the Additional State Pension. Contracting out was only available through certain types of workplace pension schemes and ended completely on 6 April 2016 when the new single-tier State Pension replaced the old two-tier system.
Contracting out was extremely common. If you worked for a large employer with a final salary (defined benefit) pension scheme at any point between 1978 and 2016, there is a high probability you were contracted out for at least some of that period.
How Contracting Out Affects Your State Pension
When the new State Pension was introduced in April 2016, HMRC calculated a “starting amount” for everyone with an existing NI record. If you had been contracted out, a deduction was applied to reflect the Additional State Pension you did not build up during those years. This deduction is known as the Contracted Out Pension Equivalent, or COPE.
Your COPE amount represents what the government estimates your workplace pension will pay you in place of the Additional State Pension you gave up. It is not a penalty – it is a reflection of the fact that the Additional State Pension contributions were paid to your workplace scheme instead of to the state.
The Impact on Your Starting Amount
The new State Pension starting amount was calculated as the higher of two figures:
- Amount A – What you would have received under the old system (basic State Pension plus Additional State Pension, minus any contracted-out deduction)
- Amount B – What you would have received under the new State Pension rules (based on your NI record to date, minus the COPE deduction)
For many people who were contracted out, this starting amount came in below the full new State Pension rate. That means you need to build additional qualifying years after April 2016 to reach the full amount.
| Scenario | Starting Amount | Action Needed |
|---|---|---|
| Never contracted out, 35+ years | £230.25/week (full) | None |
| Contracted out, starting amount below full | Below £230.25/week | Build more qualifying years after 2016 |
| Contracted out, starting amount above full | Above £230.25/week (protected payment) | None – you have a protected payment |
Understanding Your COPE Amount
Your COPE amount appears on your State Pension statement. It is not a deduction you pay or a debt – it is an informational figure showing what your workplace pension should be providing in place of the Additional State Pension. You can find your COPE amount by:
- Checking your State Pension statement on GOV.UK
- Requesting a State Pension forecast
- Calling the Future Pension Centre on 0800 731 0175
Types of Contracting Out
There were two main ways employees could be contracted out, and the type affects how your pension works today:
Contracted Out Salary Related (COSR) Schemes
These were defined benefit (final salary or career average) pension schemes. The scheme guaranteed to pay you a pension at least equivalent to the Additional State Pension you gave up. These were typically offered by larger employers, the public sector, and traditional industries. Because the benefit was guaranteed, the risk sat with the employer rather than the employee.
Contracted Out Money Purchase (COMP) Schemes
These were defined contribution schemes where the redirected NI contributions were invested in a personal pension pot. The amount you receive in retirement depends on investment performance and annuity rates. There was no guarantee that the outcome would match what the Additional State Pension would have provided. Some people in COMP schemes may find their pension is worth less than the COPE deduction from their State Pension.
Appropriate Personal Pensions (APPs)
From 1988, individuals could contract out through a personal pension rather than a workplace scheme. HMRC paid a rebate of NI contributions directly into the personal pension. Like COMP schemes, the outcome depended on investment performance. Many people were controversially mis-sold personal pensions during the late 1980s and 1990s.
How to Check If You Were Contracted Out
Several methods can help you determine whether you were contracted out:
- Check your NI record online – Your NI record on GOV.UK will show which years you were contracted out
- Look at old payslips – NI contribution letters D, E, or L indicate you were contracted out
- Contact your pension provider – Your workplace pension scheme administrator can confirm whether the scheme was contracted out
- Check your State Pension statement – It will show your COPE amount if you were contracted out
Can You Rebuild Your State Pension?
If your starting amount was below the full new State Pension because of contracting out, you can increase your pension by earning more qualifying years after 5 April 2016. Each additional qualifying year adds approximately £6.58 per week to your State Pension until you reach the full rate of £230.25 per week.
You earn qualifying years by working and paying NI contributions, or by receiving NI credits. You can also pay voluntary contributions to fill any gaps. However, once you reach the full new State Pension amount, additional qualifying years will not increase it further (unless you are building a protected payment).
What About Your Workplace Pension?
The contracted-out deduction from your State Pension should be offset by the pension you receive from the workplace scheme that was contracted out. It is important to track down all your workplace pensions, especially if you changed jobs during your career. Common situations include:
- Deferred pensions from former employers that you have not yet claimed
- Transferred pensions where your contracted-out rights were moved to another scheme
- Lost pensions from schemes where the employer no longer exists – the Pension Tracing Service on GOV.UK can help locate these
For information about the SERPS system specifically, see our guide on SERPS and your State Pension.