Personal pensions allow you to contract out of S2P and in return receive a rebate of National Insurance contributions (NICs) to invest in your plan. This can be worth over £2,000 a year, depending on your age and earnings.
Purists might argue the point but you can regard National Insurance as just another form of taxation. Most employees pay NICs at the rate of 11% on "basic rate earnings". Your basic and S2P state pensions are based on your NIC track record.
So why contract out of S2P? Well, if you invest wisely you might receive a better pension through a private fund than through S2P. However, the calculations are complicated, so it is wise to seek advice on whether your age and earnings level indicate you will benefit from contracting out.
If you belong to a company scheme you are likely to be contracted out already, in which case part of your NICs (and your employer's) are redirected into that scheme.
The self employed do not pay the full rate of NICs and are not members of S2P, so contracting out does not apply.
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