Are most occupational schemes contracted out? Is contracting out a good idea?

Many salary related schemes contract out, but it is rare for money purchase schemes to do this.

This is wise as there is one real problem for contracted out money purchase scheme members as they approach retirement. The State Second Pension is linked to how much you earn, while money purchase scheme pensions depend on how well investments perform and are therefore riskier.

This can be bad news if your money purchase scheme fund investments do badly in the years before your retirement. You end up with too many of your pension eggs in one risky basket - all of your pension income (other than the basic state pension) will depend on the same risk factors.)

With a salary related scheme the arguments are more balanced.

The advantages of contracting out are that it will probably reduce your pension contributions, and you may be 'buying' a better pension with your contributions than you would get from the state second pension.

On the other hand if your scheme is contracted 'in':

• you may be able to build up a bigger overall pension. This is because the extra National Insurance contributions you will pay do not count against the maximum pension contributions that you can pay into additional private pension schemes.
• you can still individually contract out, so you get more choice in a contracted in scheme.
But as an individual you do not get to choose whether your occupational scheme contracts in or out. The important thing therefore is to know whether you will get a State Second Pension or not. If you do not, then you will need more from your own savings and your occupational pension. 

The OPAS website is helpful.