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How the government may contribute to your pension

22 March 2007

If you work for an employer you may also be able to choose whether to contract out of the State Second Pension – S2P for short. This provides an extra pension on top of the basic State pension if you've made additional National Insurance Contributions related to your earnings. If you already belong to an employer's scheme which is contracted out of S2P, it won't apply to you. Your occupational pension scheme will provide benefits which must be no worse than the state scheme. If you're self-employed, you can't contribute to S2P unless you have formed yourself into a limited company.

Working out whether it makes sense to contract out of S2P is difficult because it doesn't just depend on future inflation rates and investment returns. It also depends on whether future governments change the entitlement.

If you do contract out of S2P, you don't have to make any further contributions to the private pension plan unless you choose to. But if you do, you'll get full tax relief on your payments up to set limits at your highest rate of tax. This means that for higher rate taxpayers, the Inland Revenue will give back £40 for every £100 of your gross earnings you pay in. Basic rate taxpayers get back £22 for every £100 they contribute.

Next: Why pensions are one of the best tax breaks around

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