The old payslip word that still changes pensions today

There is a phrase on old payslips and in old scheme booklets that almost nobody thinks about any more: contracted out. It describes an arrangement that ceased a decade ago. It also explains a great deal of what people find inexplicable about their State Pension today.

Specifically, it explains why a person with a long and unbroken working life can reach pension age on less than the full rate. And it explains why, in April 2026, some pension components rose by 4.8% while others rose by 3.8%.

What contracting out was

Under the State Pension rules before 2016 there were two layers: the basic State Pension, and on top of it the Additional State Pension — known at different times as the State Second Pension or SERPS.

An employee, or their workplace or private pension scheme, could choose to contract out of that second layer. GOV.UK describes the consequence plainly: if you were contracted out, some of your National Insurance contributions were either lower than those of people who were not contracted out, or were paid into another pension instead, such as a workplace or private scheme.

Term explained: contracted out

An arrangement under the pre-2016 rules in which an employee stepped out of the Additional State Pension. In exchange, either less National Insurance was paid, or part of it went into a workplace or private pension. All contracting out stopped on 5 April 2016.

The logic was straightforward: you were building a second pension somewhere else, so you were not also building the state’s version of it. Millions of people in company schemes spent most of their careers in this position, often without ever thinking about it.

What it does to a new State Pension

When the new State Pension began, those years had to be accounted for. GOV.UK puts it directly: if you were contracted out before 6 April 2016, you might not get the full rate of £241.30 a week, because an amount is taken off. How much depends on how long you were contracted out and on your earnings at the time.

Which produces the single most counter-intuitive sentence in the whole system, and it is the government’s own: if you were contracted out, you will usually need more than 35 qualifying years to get the full rate of new State Pension.

The familiar 35-year figure applies cleanly only where a National Insurance record started after April 2016. For everyone else there was a starting amount calculated in 2016, and contracted-out years pull that starting amount down. This is the real answer to a complaint heard constantly: I worked more than 35 years, so why am I not on the full rate? The years were worked. Some of them were building a company pension rather than the state’s second tier.

What each extra year is worth

The position is not fixed. GOV.UK states that each full qualifying year from 5 April 2016 until State Pension age adds about £6.89 a week to a new State Pension — which is the full rate divided by 35, and is why the number is what it is.

So a starting amount below the full rate can be built up by later qualifying years, until it reaches the cap. The illustration below shows the shape of that.

Illustrative only. A hypothetical £200 starting amount with GOV.UK’s stated figure of about £6.89 per qualifying year, capped at the 2026/27 full rate of £241.30. It is not a statement of any individual’s entitlement; your own position is shown on your State Pension forecast.

Two limits sit on that arithmetic. Building up only works while there are years left before State Pension age, so it is a live option for someone at 58 and not for someone at 70. And it stops at the full rate: additional years beyond the cap add nothing. Where the gap cannot be closed by future working years, voluntary contributions may be relevant — with the important caveat, covered in the National Insurance years that decide your State Pension, that for some people they would change nothing at all.

The opposite case: protected payments

Contracting out reduces a starting amount. The reverse also happened. Somebody who paid into the Additional State Pension before 2016 and would have received more under the old rules keeps that advantage: GOV.UK calls it a protected payment, and it is paid on top of the full rate of new State Pension.

That is why some people receive more than £241.30 a week and are not being overpaid. Their award is the full rate plus a protected element earned under the previous system.

Why protected payments rose by less in April

Here is where a decade-old distinction reaches into a 2026 bank statement.

The full rate of new State Pension is uprated by the Triple Lock — the highest of earnings growth, CPI inflation and 2.5%. For April 2026 that was the earnings measure, at 4.8%. A protected payment is not uprated that way. GOV.UK states that a protected payment increases each year in line with the CPI, and the government’s 2026/27 tables set that figure at 3.8%.

Rates as published in the government’s benefit and pension rates tables for 2026 to 2027.

The practical consequence is the one our main explainer flags: applying 4.8% to a whole mixed pension gives the wrong answer. A pension made of a full rate plus a protected payment went up by two different percentages, and its overall increase sits somewhere between them. That is set out in this pension rise affects millions of Britons.

People who reached pension age before April 2016

For them the effect appears in a different place. GOV.UK says someone who reached State Pension age before 6 April 2016 and was contracted out might get no Additional State Pension, or only a small amount, for the contracted-out period — while still receiving the basic State Pension in the normal way.

So the pattern holds across both systems: the contracted-out years affected the second tier, not the first. And the second pension those years were building should be sitting with a scheme somewhere, which is worth tracing if it has been lost sight of — the annual paperwork for it is the subject of the pension statement most people file away unread.

How to find out whether it applies to you

Three routes, in order of usefulness.

• Your State Pension forecast. It shows the amount based on your record, which already reflects any contracted-out deduction. For most people this answers the practical question without their needing to know the history.
• Old payslips and scheme paperwork. Contracted-out status was usually visible in the National Insurance information on a payslip and in scheme booklets.
• GOV.UK’s own guide. It includes a section on checking whether you were contracted out, and for a workplace scheme the scheme administrator can confirm it.

What is not worth doing is trying to reconstruct the 2016 starting-amount calculation by hand. It compared two sets of rules across a whole career, and the result is already reflected in the official forecast. The forecast is the output; the history only explains it.

Why a dead rule still matters

Contracting out stopped on 5 April 2016, and all National Insurance contributions have been at the standard rate since. But the arrangement ran for decades, and the new State Pension was deliberately built to carry forward what people had already earned — in both directions.

That is why a rule nobody has used for ten years remains the best single explanation of why two people with similar working lives receive different pensions, and of why the headline uprating percentage does not describe everybody’s increase.