When you contracted out, what you were doing was opting out of the state's top-up pension plan. This second or additional state pension system, also known as Serps (state earnings-related pension scheme) allowed individuals to build up entitlement to a potentially significantly higher state pension when they retired. As a result, you paid reduced National Insurance (NI) contributions and a 'rebate' from the government would have been diverted into a personal pension plan of your own, or an employer's final-salary or money-purchase scheme, to build up into a stream of income to supplement your state pension later on. In fact, as most employer schemes were contracted out, you would not have had a choice about this. But if this was the case, you would be no worse off than if you had stayed in the state's second pension scheme. This is because employer schemes had to guarantee a minimum level of pension that matched what the state top-up would have been.
Contracting out has now been completely abolished and a new flat-rate state pension has been introduced. For anyone with a full 35-year record of NI contributions who never contracted out, and whose retirement date is after 6 April 2016, their state pension will be £155.65 a week (£8,092 a year). This replaces the previous two-tier arrangement (a basic £119 state pension with additional payments going to various people such as those who paid in extra during their working life). Under that system, says Paddy Millard, a consultant to the Low Incomes Tax Reform Group, it was possible to build up a state pension in excess of £14,000 a year.
You are not alone in discovering that you are not entitled to the full amount of the new pension. The government itself estimated that in the first year of the new state pension only half the people retiring in this period would be entitled to the full level. Anyone who built up an entitlement under the old system in excess of the new £155.65 limit will have that access protected.
This guarantee to pay the higher of the old or new doesn't help you, though, as because you were contracted out, your old-style state pension will be on the low side anyway.
You haven't necessarily lost out. You have to take account of how the rebated NI was used. By contracting out, you might actually now be better off, or no worse off. Although if your rebated NI was paid into a personal pension, high plan charges might have prevented this pot from reaching its full potential. Perhaps you were invested in a company or public sector final-salary pension scheme? If so, then what you have lost from the state, you will gain from this pension plan.
So what can you do now to boost your pension? Without having detailed information about your situation, it's difficult to say. There are some general actions that you can consider.
If by the time you retire you will not have made 35 years of contributions, there is a facility to make voluntary additional contributions to fill in the gaps.
Even if you have made 35 years of contributions, if you now carry on paying NI you can continue to build up your State Pension to the maximum £155.65 a week up until you reach state pension age.
For people who reached the retirement age before 6 April 2016, there is a window in which they can make top-ups to buy extra pension, but only until 5 April this year. Go to the state pension top-up calculator at www.gov.uk/state-pension-topup.
Note that while you can continue working past state retirement age, you cannot make NI contributions after you reach the state pension age.
If you defer taking the state pension you can increase the amount you will be paid. By deferring for one year, you'll get an extra £468 a year. Do nothing if you want to defer. Your pension will automatically be deferred until you claim it.
You could also check you are using your full personal pension allowance subject to the annual limit of £40,000, or less for the highest earners, and the £1m lifetime cap, and you can also make use of any allowance you didn't use from the previous three tax years.