Contracted Out Scheme

What You Need To Know About The Contracted Out Scheme

As any financial adviser will tell you it is important not to just look at the most obvious paths when examining your financial future but also to research other options which might not initially occur to you. In examining the best option for their financial future many people completely overlook the additional state pension and end up 'contracting out' without even realising it. So, what is the additional state pension and what do you need to know about contracted out schemes?

A few years ago contracting out was widely regarded as one of the best ways of boosting retirement wealth.

What Is The Original State Pension?

The additional State Pension, also known as S2P, is an earnings-related pension scheme, which was introduced to replace SERPS in 2002. Under this extra state pension, certain employees are able to accumulate an additional state pension on top of the basic state pension. This scheme is primarily aimed at low to moderate earners, carers and people with a long-term illness or disability as a means of providing more generous state pension provision.

What Is A Contracted Out Scheme?

Anybody who has made the decision that the best financial way forward for them would be to take out an Occupational or Stakeholder Pension has effectively decided to participate in a 'Contracted Out Scheme' by contracting out of the additional state pension scheme, also known as S2P. So far around three million people have chosen to contribute towards Contracted Out Schemes rather than participate in the additional state pension, or its predecessor SERPS.

When Will The Contracted Out Scheme Best Suit Your Financial Future?

A few years ago contracting out was widely regarded as one of the best ways of boosting retirement wealth. However recently some cases have come to light whereby financial advisers have, in the past, badly advised people regarding the Contracted Out Schemes. The FSA found that a lot depended on when individuals had opted out, how long they were contracted out for, their age, and the performance and charges of the personal pension scheme which had been chosen. It should be noted that each situation needs to be assessed individually by a reputable financial adviser before contracting out advice can be given.

As a general rule of thumb the Contracted Out Schemes normally suit younger people who are on a higher income. However, the best way to decide whether or not contracting out is suitable for you is still to speak to an independent financial adviser who will help you to decide by considering your earnings and how far off retirement age you are.