When Did Contracting Out of State Pension Start?
The practice of contracting out of state pension in the UK began in the 1970s. It was a way for employers to provide their employees with an alternative to the state pension system, which was seen as inadequate by many people. It was also a way for the government to encourage the development of private pensions and reduce the burden on the state pension system.
The contracting out scheme allowed individuals to opt out of the state pension system and instead contribute to a private pension scheme. This meant that the individual`s National Insurance contributions were redirected from the state pension system to the private pension scheme. The government provided a rebate to the individual`s pension scheme to compensate for the loss of the individual`s National Insurance contributions.
The scheme was primarily aimed at defined benefit pension schemes, which promise a certain level of pension income in retirement based on a formula that takes into account the individual`s salary and length of service. The scheme was less beneficial for defined contribution pension schemes, which are less generous in terms of the pension income they provide.
The contracting out scheme was designed to be revenue neutral for the government, as the rebates provided to private pension schemes were intended to offset the reduction in revenue from National Insurance contributions. However, the scheme was criticized for being too complex and confusing for many people, particularly those who were not financially literate.
In 2016, the government made changes to the state pension system and abolished the contracting out scheme. This meant that individuals could no longer opt out of the state pension system and redirect their National Insurance contributions to a private pension scheme. Instead, everyone was required to pay into the state pension system, which was reformed to provide a simplified and more generous pension income.
In conclusion, contracting out of state pension started in the 1970s as a way to provide an alternative to the state pension system and encourage the development of private pensions. The scheme allowed individuals to opt out of the state pension system and contribute to a private pension scheme, but was criticized for being too complex and confusing. The scheme was abolished in 2016 when the government reformed the state pension system to provide a simplified and more generous pension income.