The state pension is made up of two parts: the basic state pension which currently stands at £102.15 and the additional pension which is earnings related.
It is this additional pension which was formerly known as State Earnings Related Pension Scheme (SERPS) and now known the State Second Pension (S2P) which you can opt out.
The opting out process is known as contracting out.
Contracting out of the state pension simply involves joining a private or company pension instead of paying into the Second State Pension.
This shifts the responsibility of the additional second pension to you or your employer. The advantages of opting out is that you and your employer pay a lower rate of National Insurance Contributions (NICs).
Final salary schemes
Initially the contracting out option was only available to those on the final salary schemes (defined benefits), however later it was extended to those who had money purchase schemes such as stakeholder pensions or personal pension plans (defined contribution), although they did not pay lower NICs, instead they received a rebate of NICs directly into their pension.
Rules are changing
From April 2012 the rules for contracting out are changing. Those on money purchase schemes will no longer have the option to opt out. Anyone who has opted out will automatically rejoin the State Second Pension.
They will still be able to continue to contribute to their scheme but they will no longer get the rebate of NICs. The contracting out option will continue for those on the final salary scheme.