Contracted-Out Scheme

Contracting-out applied to people who were contracted out of the Additional State Pension from 6 April 1978 to 5 April 1997, during which their workplace pension scheme provided a Guaranteed Minimum Pension (GMP) — a GMP is a minimum pension that a workplace pension scheme normally provides, usually equal to or greater than the Additional State Pension the member would otherwise have earned. In return, both the member and employer paid a reduced rate of National Insurance contributions. Pension schemes did not have to provide indexation to GMPs built up between April 1978 and April 1988, while GMP built up from April 1988 to April 1997 required annual indexation in line with living costs (capped at 3%).

Contracting-out of the state second-tier pension ended with the introduction of the new State Pension: the new State Pension started on 6 April 2016, and anyone reaching State Pension age on or after that date gets the new State Pension rather than the old basic State Pension plus Additional State Pension, so the government indexation increases that used to be added through the Additional State Pension no longer apply to their GMP. People affected by a GMP built up during the contracted-out period may need to contact DWP to check how their pension is calculated, since private and public sector schemes handle any resulting GMP shortfall differently.