Contracting out and the Guaranteed Minimum Pension

Contracting out was an arrangement that let you, or more often your pension scheme, opt out of part of the state pension in exchange for lower National Insurance contributions or a rebate into a workplace or personal pension. Under the State Pension rules before 2016, you or your workplace or private pension scheme could choose to contract out of the Additional State Pension, which was also known as the State Second Pension or SERPS¹. In return, the scheme had to promise you a minimum pension, called the Guaranteed Minimum Pension, or GMP.

Contracting out is long finished: all contracting out stopped on 5 April 2016, when the new State Pension began¹. But its effects live on in two places. First, if you were contracted out, a deduction is made when your new State Pension is worked out, because you paid less National Insurance at the time². Second, if you were contracted out between 6 April 1978 and 5 April 1997 while in a defined benefit workplace scheme, you may have a GMP sitting inside that pension, with its own rules about how it grows and how it is paid³.

This page explains what contracting out meant, how the GMP works, how it affects the new State Pension, what happens to a GMP in a transferred pension such as a section 32 buy-out policy, and where to check your own record.

What contracting out meant for your pension

The state pension used to come in two parts: a basic pension for nearly everyone, and a second-tier top-up pension, introduced in 1978, based on your earnings⁵. That top-up went through several names, SERPS, then the State Second Pension, and is now called the Additional State Pension¹. If you were employed, you built it up automatically through your National Insurance contributions, and you get the Additional State Pension automatically if you are eligible for it, unless you were contracted out⁶.

Contracting out meant leaving that second part. In a defined benefit company pension scheme, it worked by lowering your National Insurance contributions: this is no longer possible, but it was an option for those in defined benefit company pension schemes⁷. Instead of building up your state pension entitlement, you received a boost to your workplace pot⁸. From 1988, the government extended contracting out to defined contribution schemes and personal pensions⁵. There, you paid the usual rate of National Insurance, but some of those contributions were rebated into your workplace pension⁸.

The trade was therefore simple in outline: less state top-up pension, more money in your own scheme. Whether it paid off varied from person to person. An independent report written for the FSA in August 2005 concluded that, in purely financial terms, most people who contracted out or stayed contracted out that year were likely to get a lower pension than if they had stayed in the State Second Pension⁹. That was a judgement about one year, not a verdict on every scheme, but it shows the deal was not automatically a win.

Two things are worth being clear about. Contracting out was not the same as opting out of a workplace pension altogether, which is a separate choice you can still make today¹⁰. And being contracted out does not create a hole in your National Insurance record: years where you were contracted out count as qualifying years and are not gaps⁴. The effect is on the amount, not the qualification.

The Guaranteed Minimum Pension: what it is and where it came from

A GMP is a minimum pension that a workplace pension scheme normally provides³. It only applies if you were contracted out of the Additional State Pension from 6 April 1978 to 5 April 1997³. In other words, it is the scheme's side of the bargain: because you gave up some state top-up pension, the scheme had to promise you at least a minimum amount in return. If you were a member of a contracted-out defined benefit scheme before 6 April 1997, you may receive a GMP¹¹.

The GMP is not a separate pot of money. It is a measured amount within your defined benefit pension, and defined benefit pensions of this kind offer a regular pension income, guaranteed by a sponsor which is usually the employer, with the amount linked to your salary and length of service¹³. The amount you get at retirement is guaranteed and paid directly to you¹⁴. That is what distinguishes it from money in a defined contribution pot left invested, where your retirement income is not guaranteed and can rise and fall until you take the money¹⁵.

The GMP also carries its own rules about increases. Each year pension schemes have to increase the amount of GMP built up from April 1988 to April 1997 in line with living costs, capped at three per cent³. If you have a public sector pension, any indexation you built up from April 1978 to April 1988 is protected and will be paid by your pension scheme³. If you have a private sector pension and left before the scheme's pension age, your GMP may have a fixed rate revaluation until you reach retirement age³. The government has consulted on setting a new fixed rate revaluation of 3.25% a year for contracted-out members leaving pensionable service in the period 6 April 2022 to 5 April 2027, though that rate was proposed rather than final¹⁶.

Because the GMP is a promise from the scheme, it also comes with survivor protections. Where an earner's pre-conversion benefits include a guaranteed minimum pension, and the scheme before conversion provided that a widow, widower or surviving civil partner would be entitled to a GMP on the earner's death, those entitlements are preserved when schemes convert benefits¹⁷.

Contracting out ended when the new state pension began

All contracting out stopped on 5 April 2016¹. From 6 April 2016, contracting out ended and individuals are no longer able to contract out of the additional state pension¹². The single-tier state pension was introduced in April 2016, replacing the previous system in which you could contract out⁵. For people who had been contracted out, National Insurance contributions went up to the standard rate from that date.

The change also altered how GMPs are increased. Under the old system, increases to cover living costs were paid through the Additional State Pension; those increases ended when the new State Pension started, for people reaching State Pension age on or after 6 April 2016³. Responsibility for inflation-proofing the GMP therefore shifted onto the pension scheme itself, which is one reason GMP increases have been the subject of legislation, consultations and, in some cases, complaints since 2016¹⁶.

If you were contracted out, there is a further practical consequence flagged in reporting on the issue: your state pension entitlement could be affected if your company pension overpaid you, because contracting out meant reduced National Insurance contributions in return for a lower state pension⁵. Where schemes discover errors in GMP calculations, corrections can follow, in either direction.

How contracting out affects your new state pension

The new State Pension, which applies to people reaching State Pension age on or after 6 April 2016, is worked out differently from the old system. Your starting amount is calculated two ways, under the old rules and under the new rules, and you get the higher of the two. If you were in a contracted-out personal or workplace pension scheme, a deduction is made from both calculations². This is known as the contracted-out deduction, and it is common among people who spent years in public sector or defined benefit schemes.

The deduction reflects the National Insurance you did not pay. If you were contracted out of the Additional State Pension, some of your National Insurance contributions were either lower than those of people who were not contracted out, or were paid into another pension such as a workplace or private pension¹. The deduction claws that back from the state side of the calculation, so the money is not lost, but it sits in your workplace or personal pension rather than in your State Pension.

Two important qualifications soften the effect. First, contracted-out years count as qualifying years and are not gaps in your National Insurance record⁴, so contracting out does not stop you qualifying for a State Pension at all. Second, the starting amount is a floor, not a ceiling: some people who had been contracted out can build up a maximum of over £2,150 a year more pension than under the old State Pension, based on 2021 to 2022 rates, from contributions after 2016³. Each year of work after April 2016, with National Insurance paid at the standard rate, can add to the amount.

For context on what the State Pension is worth in the benefits system, the New and Basic State Pensions and the Minimum Guarantee element of Pension Credit rose by 4.1% in April 2025¹⁹. Pension Credit itself is made up of two parts, Guarantee credit, which tops up your weekly income to a minimum sum set by the government, and Savings credit²⁰. Guarantee Pension Credit requires that you or your partner have reached State Pension age and are on a low income; you can be working or not working and do not have to have paid National Insurance contributions²¹. A lower State Pension caused by a contracted-out deduction can therefore affect means-tested entitlements, and it is worth checking rather than assuming.

GMP in a transferred pension: section 32 buy-out policies

Many people who left a defined benefit scheme did not leave their GMP behind: it travelled with the transfer. A common destination is a section 32 buy-out policy, an insurance contract set up with the transfer value from an occupational pension scheme. The Pensions Ombudsman's list of scheme types it covers includes section 32 buy-out policies alongside workplace, employer and stakeholder pension schemes, personal pension plans and annuities²².

The key point about a GMP inside a transferred pension is that the guarantee travels but the increases may not. If you have a Guaranteed Minimum Pension, also known as a Contracted Out Pension Equivalent (COPE), component within your pension, you may not receive the full increase²³. This is a known issue with older policies: the obligation to increase GMP built up from April 1988 to April 1997 in line with living costs, capped at three per cent, rests on the scheme or policy³, and some section 32 policies were written in terms that fall short of the full requirement.

Transfers involving GMPs can also be restricted. You might not be able to transfer your pension if you have a share of an ex-partner's pension following a divorce, or a scheme with special features or guarantees like a Guaranteed Minimum Pension²⁴. The government has also consulted on tightening the conditions for transfers, with the Department for Communities making corresponding legislation for Northern Ireland in line with the parity principle²⁵, and more broadly on enabling contractual overrides for contract-based pension arrangements, subject to appropriate member protections²⁶.

Consumer rules add one more wrinkle. There is normally no right to cancel a pension contract effected by the trustees of an occupational pension scheme, or by the employer, trustees or operator of a stakeholder pension scheme, where it represents a pension buy-out contract, among other cases²⁷. In plain terms, a section 32 buy-out set up by scheme trustees is not something you can unwind in a cooling-off period the way you might cancel other financial products.

If you are considering a transfer out of a final salary scheme that contains a GMP, the risks of transferring and the advice rules are covered on the final salary transfers and transfer risks pages, and the mechanics are on transferring between providers.

Was contracting out the same in Northern Ireland?

In substance, yes. Occupational pensions are a devolved matter for Northern Ireland, and the UK government works closely with counterparts in the Department for Communities there²⁵. That department makes corresponding legislation in line with the parity principle²⁵, and Northern Ireland regulations are made under the Pensions (Northern Ireland) Order 1995 and the Pensions Act (Northern Ireland) 2015 to mirror GB provision²⁸. So the same core facts apply: a person could accrue a GMP in a contracted-out occupational pension scheme between 1978 and 1997²⁹, and the Guaranteed Minimum Pensions Increase Order (Northern Ireland) 2025 increased GMPs with effect from 6 April 2025²⁹.

The administration differs in places. The basic State Pension in Northern Ireland is claimed by contacting the Northern Ireland Pension Centre³⁰, and staff there can tell you how income from paid work will affect your Pension Credit and other benefits³¹. Northern Ireland's benefit legislation runs in parallel: for example, references to a person in receipt of a guarantee credit, a savings credit or State Pension credit include a person who would be in receipt of it but for the rule on small amounts of State Pension credit³². The practical effect for a reader is that the rules on contracting out and GMPs are the same, but the phone numbers and offices to contact differ, and the State Pension in Northern Ireland page covers those differences.

Where to check your contracted-out history and get help

The first step for most people is the 'Check your State Pension' forecast service, available on GOV.UK or via the Personal Tax Account⁵. It shows your record, your contracted-out years and the effect of any contracted-out deduction on your forecast. To find out whether you have paid enough National Insurance contributions to qualify for the new State Pension, you can request a State Pension statement online at GOV.UK, or contact the Pension Service or the Northern Ireland Pension Centre by telephone or post³³.

If you need to track down an old scheme, there is a free service to find pension contact details, though it requires the name of the employer or pension provider and does not tell you whether you actually have a pension³⁴. The Pension Tracing Service can be used to find details of a person's personal or workplace pension, including after someone has died³⁵. If you think your State Pension may have been underpaid, contact the Pension Service and ask them to check that it has been correctly calculated, whether you are claiming it or delaying it³⁴; if the person who died lived abroad, the route is the International Pension Centre³⁶.

Where a workplace pension itself has gone wrong, for example missing payments, The Pensions Regulator can be contacted, and it asks for the name and address of your employer, the employer's PAYE number if they have one, how much money you think is missing and when, and any evidence³⁷. For complaints, the division of responsibility matters: complaints about the State Pension, including the contracted-out deduction, need to go to the Department for Work and Pensions (DWP), not the ombudsman³⁸. The Pensions Ombudsman itself deals with workplace, employer and stakeholder pension schemes, personal pension plans, section 32 buy-out policies, annuities and other arrangements²², and publishes guidance on where to go for help with a pension complaint²².

Free, impartial support is available from several directions. Pension Wise offers free guidance, including on the State Pension and on your options for taking money from a pension³⁹. Independent Age and Turn2us provide help on pensions and State Pension entitlement³³, and charities including Carers UK publish guidance on Pension Credit, including a calculator on the Gov.uk website to see if you might qualify⁴⁰. If your income in retirement is low, whether because of a contracted-out deduction or anything else, checking Pension Credit eligibility is worthwhile, since it can be claimed whether or not you have paid National Insurance²¹.

For wider background, the pensions guide covers the whole landscape, workplace pensions, defined benefit pensions and defined contribution pensions explain the two scheme types, and the new State Pension and basic State Pension, SERPS and Additional State Pension pages cover the state side in more detail.