Contracted out years and your State Pension

If you were contracted out of the Additional State Pension at any time before 6 April 2016, DWP made a deduction when it worked out your new State Pension starting amount. The deduction reflects the lower National Insurance you paid, or the contributions redirected into a workplace or personal pension, which is expected to pay that part of your pension instead. Contracted out years still count as qualifying years, but you will usually need more than 35 of them to reach the full rate of £241.30 a week in 2026 to 2027.

What was contracting out?

Under the State Pension rules before 2016 there were two parts: the basic State Pension and an earnings related Additional State Pension, known as SERPS from 1978 and as the State Second Pension (S2P) from 2002 to 2003. GOV.UK explains that you or your pension scheme could choose to contract out of the Additional State Pension. While contracted out, you either paid National Insurance at a lower rate, or some of the contributions you paid went into a workplace or personal pension instead.

DWP’s guidance says members of defined benefit (final salary) schemes are likely to have been contracted out, as are members of any workplace scheme before April 2012 and some stakeholder and personal pensions. Its contracting out fact sheet says most people reaching State Pension age in the first decades of the new State Pension will have been contracted out at some point. All contracting out stopped on 5 April 2016.

How was your starting amount worked out?

If you have qualifying years before 6 April 2016, your pension is the transitional rate under section 4 of the Pensions Act 2014. Schedule 1, paragraph 2 sets out the calculation of the amount for those earlier years:

1. Old system. The basic and Additional State Pension you would have got if you had reached State Pension age on 6 April 2016.
2. New system. The full rate of the new State Pension at 6 April 2016, or a 35th of it for each qualifying year if you had fewer than 35, less an amount to reflect contracting out (paragraph 4).
3. The higher of the two becomes your foundation amount, now called the starting amount.

Both figures take contracting out into account, but in different ways. In the old system calculation the Additional State Pension is already reduced for the contracted out periods. In the new system calculation paragraph 5 deducts the difference between the Additional State Pension you actually built up and what you would have built up had you never been contracted out. DWP’s fact sheet calls this deduction the Rebate Derived Amount.

What does the contracted out deduction represent?

The deduction is not a penalty. It stands for pension you were expected to build up privately instead of in the state scheme. DWP’s fact sheet describes three pieces:

• 1978 to 1997: the Contracted Out Deduction. For defined benefit schemes this equals the Guaranteed Minimum Pension (GMP) the scheme must pay.
• 1997 to 2002: a notional deduction equal to the SERPS you would have had if you had been contracted in.
• 2002 to 2016: the deduction made from the State Second Pension for contracted out periods.

In DWP’s worked example, a man contracted out in a defined benefit scheme throughout his career has a Rebate Derived Amount of £76 a week, and the fact sheet says this £76 “will be paid by the private pension provider as part of the overall pension payable by the scheme”. When you see a State Pension forecast below the full rate despite a long working life, this is usually the reason, and the missing amount should be found in your workplace or personal pension, not lost.

What does DWP’s own example show?

The fact sheet uses 2015 to 2016 figures, when the full new State Pension was illustrated at £151.25 a week. For a man with over 35 qualifying years, always contracted out in a defined benefit scheme:

Calculation	Weekly amount
Old system: basic State Pension £115.95, plus gross SERPS £38 less deduction £38, plus gross S2P £40 less deduction £28	£127.95
New system: £151.25 less Rebate Derived Amount £76	£75.25
Starting amount (the higher)	£127.95

The figures are DWP’s illustration, not current rates, but the pattern is typical. A long contracted out career usually produces an old system figure that beats the new system figure, and a starting amount below the full rate.

Can later years make up the difference?

Yes, up to a cap. Section 5 of the Pensions Act 2014 adds the amount for qualifying years from 6 April 2016 onwards to the starting amount and caps the total at the full rate. Schedule 1, Part 3 values each later year at a 35th of the full rate. GOV.UK puts this at about £6.89 a week for each full qualifying year from 6 April 2016 until you reach State Pension age.

GOV.UK also confirms two points that are often misunderstood. Years when you were contracted out count as qualifying years and are not gaps in your record. And if you were contracted out you will usually need more than 35 qualifying years to get the full rate.

Illustration only. Rachel’s starting amount, uprated to 2026 to 2027 levels, is £175 a week and she has worked every year since. Ten years from 2016 to 2017 to 2025 to 2026 add about £68.90, which takes her past the full rate, so she will get £241.30 and further years add nothing. If she had stopped work in 2016, she would be about £66 short and would need 10 more qualifying years to close the gap.

What if your starting amount is above the full rate?

Some people, usually those with large amounts of Additional State Pension from contracted in years, have a starting amount above the full new State Pension. GOV.UK says they get that higher amount, and the excess is called a protected payment. Schedule 1, paragraph 6 revalues the excess in line with prices rather than the full rate, and DWP’s fact sheet confirms protected payments are uprated by prices. Extra qualifying years after 2016 do not increase the pension of someone already above the full rate.

How do you check whether you were contracted out?

GOV.UK suggests looking at payslips from before 6 April 2016. The National Insurance category letters D, E, L, N or O mean you were contracted out. Those letters have different meanings today, as our page on National Insurance category letters explains, so read old payslips by their date. You can also ask former employers and pension providers, and use the Pension Tracing Service if you have lost touch with a scheme.

Should you pay voluntary contributions to fill the gap?

Only where the forecast shows it will increase your pension. GOV.UK’s own example is Jo, aged 60, whose contracted out forecast is £170 a week: each of seven years of voluntary contributions would add £6.89 a week, but Jo would still not reach the full rate. Paying for a year after you have already reached the full rate adds nothing. Check your National Insurance record and forecast first, then see voluntary Class 3 contributions for the cost and time limits. If you are thinking of claiming later, State Pension deferral is a separate way to increase the weekly amount.

What are the common mistakes?

• Reading contracted out years as gaps. They are qualifying years.
• Assuming the shortfall is lost. It sits in the scheme pension, often as a GMP.
• Buying years beyond the full rate. The cap in section 5 makes them worthless.
• Counting years, not money. With contracting out, only the forecast tells you where you stand.

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Related Accountapedia entries

• Home Responsibilities Protection and missing years
• Voluntary Class 2 contributions
• The pension annual allowance
• National Insurance classes explained
• The married women’s reduced rate election

Sources

• GOV.UK: Contracted out
• GOV.UK: Your state pension explained
• GOV.UK: The new state pension transition and contracting out fact sheet
• legislation.gov.uk: Act 2014 c. 19, section 4
• legislation.gov.uk: Act 2014 c. 19, schedule 1
• legislation.gov.uk: Act 2014 c. 19, schedule 1
• legislation.gov.uk: Act 2014 c. 19, section 5
• GOV.UK: New state pension

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.