Contracting out of the Additional State Pension

In 1988 it was possible for employees to contract out of the State Earnings-Related Pension Scheme (SERPS), now called the State Second Pension (S2P), where their work scheme did not do this for them already, and set up a form of Personal Pension Plan called ‘Protected Rights’.

Protected Rights are pension funds built up with contributions paid by the government into a Money Purchase or Defined Contribution pension scheme when an employee decides not to participate in S2P (or its predecessor SERPS).

Occupational Final Salary schemes (also known as Defined Benefit schemes) have been able to do this for a much longer time period. Such a scheme provides comparable benefits to the Additional State Pension in return for lower National Insurance Contributions.
Companies could also contract out via a Money Purchase scheme on a similar basis. The scheme would then be called a Contracted Out Money Purchase Scheme or COMP Scheme.

However, from 1988, contracting out was also possible for employees who were either in a contracted-in occupational scheme or in a personal pension.

Employees who contracted out paid the full National Insurance rate as normal and the Department for Work and Pensions repaid some of it in the following tax year, to the plan of the employee’s choice.This money was invested as the employee chose from the range of funds made available by the insurance company they were using.