Since the introduction of the state earnings-related pension scheme (SERPS) in 1978, employees who have adequate private provision have been able to "contract out", that is to give up all or part of the benefits of SERPS. In return they pay lower National Insurance contributions, or receive rebates of National Insurance contributions paid into their defined-contribution (money purchase) pension schemes or personal pensions.
This principle continued following the introduction of the state second pension (S2P), which replaced SERPS in April 2002.
Rates of reductions in National Insurance contributions and rebates are generally reviewed every five years. The Secretary of State for Work and Pensions is required to present to the UK parliament a report by the Government Actuary on the reductions in contributions and rebates.
The Pensions Act 2007 has made some changes to the arrangements for contracting out of S2P. In particular, the Act provides that contracting out on a defined contribution basis (via contracted-out money purchase schemes (COMPS), mixed benefit schemes contracting out on a money purchase basis and appropriate personal pension schemes (APPS)) will be abolished from a date appointed by the Secretary of State. In addition, the Act specifies a move to a system of two bands of S2P accrual with effect from the 2010-11 tax year and this will affect rebates paid to APPS. All readers should ensure they have regard to the relevant legislation, particularly concerning those areas of contracting out affected by changes introduced by the Pensions Act 2007.
Review for the quinquennium from 6 April 2012 to 5 April 2017
Review of contracting-out terms 2011
The Secretary of State for Work and Pensions presented a report to the UK parliament in February 2011 which covers the National Insurance rebates for the period 6 April 2012 to 5 April 2017.The Secretary of State's report includes two reports by the Government Actuary which were informed by public consultation. The consultation document was issued on 23 August 2010.
Review for the quinquennium 6 April 2007 to 5 April 2012
Following a previous consultation exercise, the Secretary of State for Work and Pensions presented, on 1 March 2006, a report to the UK parliament on the rates of contribution reductions and rebates for the period 6 April 2007 to 5 April 2012, together with the relevant Government Actuary’s report.
Rebate rates for years beyond 2011- 12 for illustrations of money purchase benefits
For some purposes, particularly illustrations of money purchase benefits (including the statutory illustrations to be provided under Pensions Technical Memorandum TM1: Statutory Money Purchase Illustrations), it may be necessary to know the contracted-out rebate rates as a percentage of earnings for years beyond the end of the quinquennium covered in the latest rebate orders.
The technical memorandum can be obtained from the website of the Board for Actuarial Standards:
The Excel files below give rebate rates for the entire future working lives of those aged 15 and above as at 5 April 2011, as described in paragraph B1.2 of appendix B of the technical memorandum.
The rates are based on the assumptions adopted in the Government Actuary’s report for the quinquennium from 6 April 2007 to 5 April 2012, with the additional assumption that the cap of 7.4% is retained throughout.
In applying these projected rebate rates, it is important to have regard to the provisions of the Pensions Act 2007. As noted above, this Act provides that contracting out on a defined contribution basis will be abolished from some future date. Furthermore, the file attached below for APPS shows the projected rebate rate for Band 3 earnings, which is currently based on a 20% accrual rate. However, under the Pensions Act 2007, this earnings band will no longer exist from 2010-11 and it will instead be included in band 2 earnings (based on a 10% accrual rate). The rebate order for the years 2007-08 to 2011-12 (S.I. 2006 No. 1009) was amended to reflect these changes by the Pensions Act 2007 (Supplementary Provisions) (No 2) Order 2009 (S.I. 2009 No. 3094).
- Download a copy of the forward projection of APP rebates
(Microsoft Excel document, 55KB) - Download a copy of the forward projection of COMP rebates
(Microsoft Excel document, 54KB)
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