State Earnings Related Pension Scheme 2002

State Earnings Related Pension Scheme (SERPS) - 1978 - 2002

Please note SERPS was replaced by the State Second Pension Scheme on 6 April 2002 although people still have the credit that they built up before 2002.

SERPS are Government run second pensions in addition to your basic state pension.  They are only available to employees.  They are paid for out of your National Insurance Contributions.

SERPS commenced in April 1978 and was for people in employment.  Part of your National Insurance Contributions were used to purchase a second tier pension scheme over and above the Basic State Pension Scheme.  This was replaced by the State Second Pension Scheme (S2P) in 2002.   These schemes are designed to help lower earners to have a greater pension in retirement.

Those moderate and higher earners were strongly encouraged to 'contract out' of these State Schemes.  This then redirected part of yours and your employers National Insurance Contributions into your own pension fund in the form of a rebate.  The rebate invested over the years into your own fund may be more or less than the SERPS or S2P pension.  This was known as CONTRACTING OUT of SERPS and is now known as contracting out of S2P.

If you chose to contract out of SERPS you could do this via a Personal Pension (this is known as protected rights) or a Company Scheme which may be either protected rights or guaranteed minimum pensions (GMP).

If you did this via a Company Occupational Scheme you will normally see a reduction in the amount of NI you pay as your employer will forward the NI portion that would normally pay for your second pension onto your pension company.  If you contract out via a personal arrangement you will not see any difference in the National Insurance that you pay.  The pension company that you select will normally collect the portion of your National Insurance contributions that apply to your second pension from the DSS at a later date.

You can obtain A STATE PENSION FORECAST - This is done by completing a BR19 form - you can download a BR19 form to send to the Pensions Service.

How is your SERPS pension calculated?

Benefits are based on the number of years you have paid National Insurance Contributions and your earnings when you actually paid the contributions.

Employees do not pay National Insurance if you earn below a certain weekly figure.  This is known as your Lower Earnings Limit.

Employees who earn above this limit will pay a reduced rate of National Insurance on the lower earnings portion and a higher rate on earnings above this.

Employees also do not pay National Insurance above a certain weekly pay figure.  This is known as your Upper Earnings Limit.

The middle bit between the lower earnings limit and the upper earnings limit is known as your Middle Band Earnings.  This is what your second pension is based upon.

You will get a second pension based on the years that you paid National Insurance contributions and a % of your earnings for that year (the salary figure for each year is increased to represent a current day value when you retire by increasing it generally in line with earnings).

Speak to an adviser today about SERPS.

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Contracting Out Of State Earnings Related Pension Scheme (SERPS) - 1978 to 2002

Please note that the SERPS pension scheme was replaced by the State Second Pension Scheme (S2P) on 6 April 2002 and now the S2P has also stopped.  Meaning that many contracting out benefits have been converted to ordinary pension rights with the exception of some contracted out company pension schemes.  

Contracting Out Of SERPS

Although you cannot choose to leave the Basic State Pension, you were able to choose to leave or 'contract out' of the State Earnings Related Pension Scheme and join a private scheme of some kind instead.

If you chose to join a Company Pension Scheme run by your employer they may have set up a 'contracted out' Occupational Pension Scheme.  In most cases, 'contracting out' in this way meant that you and your employer paid lower National Insurance contributions.  When you retire, your additional pension 'SERPS' part of your pension will come from your employer’s scheme and not from SERPS.

GMP and Protected Rights

You may have seen words in your pension statement such as GMP - Guaranteed Minimum Pension or PR - Protected Rights depending upon the type of company pension scheme you have.

Another way of contracting out of SERPS was through a Personal Pension or a Stakeholder Pension.  Instead of paying lower National Insurance contributions, once a year the Inland Revenue would pay directly into your personal pension or stakeholder pension an amount that was equal to what you would have paid towards SERPS.  This is called the contracted out rebate.  You could also join a personal pension scheme or stakeholder pension without contracting out of SERPS, but if you did this, you would not have got the rebate.

You may have seen words in your pension statement such as PR - Protected Rights or you are more likely to have had a separate pension scheme sometimes known as a Protected Rights Plan or a Rebate Plan.

If you did not contract out of SERPS or had periods of employment when you were not 'contracted out'  you will receive a SERPs pension.

The amount you will get when you retire will depend on the amount of the earnings that you paid National Insurance contributions on.  The higher your earnings (up to a maximum level), the higher your pension from SERPS.

If you contracted out of SERPS

If you did contract out of SERPS, the amount you will get when you retire will depend on the size of the fund built up from the National Insurance rebate payments put into it.  How well this money has been invested and performed and how much the pension company running your pension has charged you for looking after your pension.

The amount you will get from a contracted out pension when you retire will depend not just on the size of your fund, but also on other factors – particularly interest rates at the time.  Your overall pension is likely to be higher if you pay your own contributions into the fund as well.

Your contracted out pension fund is invested in company shares and other investments, so its value may fall as well as rise.  This means that your contracted out pension may provide you with less pension when you retire than what you would have got from SERPS.  It may also provide you with more.

Reviewing Your Decision To Contract Out Of SERPS

The vast majority of people who opted out of SERPS (and did not have access to an employer’s pension scheme) may gain from their decision.

The decision about whether you should continue with your contracted out pension or go back into the current State Second Pension will depend on a number of factors.  These include your age and the amount that you earn.  It is difficult to generalise, but as a general guide you should review your existing contracting out arrangements every year.

From 6th April 1997 there was also a change in the way that the rebate payments were calculated that might also affect your position.  The change moved the calculation of the rebate payment from being a set percentage of earnings almost irrespective of age, to a percentage that increases as you get older.  This means that the amount of the rebate payment increases the older you get (up to a maximum).

The above are only guidelines and many pension companies are suggesting that people should 'contract back in' to the State Second Pension Scheme.  Indeed, some have made this the default position.  If you do not tell them otherwise, they may automatically register you back with the State scheme i.e.  'contract you back in'.

2.  State Pension Benefits - The State Graduated Retirement Scheme 1961 - 1975

The State Graduated Retirement Scheme was replaced by SERPS in 1978.  Babara Castle introduced SERPS as part of the Social Security Pensions Act 1975 which actually did not start until 1978 meaning there was a 3 year gap between second tier state pensions (on top of the basic state pension) between 1975 and 1978.

If you do not service your pensions regularly, just like your car, they will breakdown:

• We save people money everyday on both state pensions and private pensions with our pension review.  Book a pension review now.

What is the State Graduated Scheme?

The State Graduated Scheme was a second tier 'state' pension paid for by national insurance contributions.  It is still paid today to those that contributed between 1961 and 1975 and is paid in addition to your basic state pension.

The graduated scheme operated between 1961 and 1975.  There was a gap between 1975 and 1978 as the Government at the time had a number of issues to resolve in how they would run the new style second tier pension scheme.  Eventually, some three years later SERPS was the result.  Similar to SERPS and the now State Second Pension (S2P) in that it was earnings related contributions based upon National Insurance contributions and that it offered a top up to the Basic State Pension. 

The Graduated Scheme was not available for the self-employed.

The simple numbers were that for a certain amount of contributions paid from National Insurance contributions, a second pension was obtained.

• Each £7.50 of National Insurance contributed to the graduated scheme by a man and £9.00 for a woman bought One Graduated Retirement Benefit Pension Unit (please note not all your National Insurance was paid towards your state pensions).

• Originally each pension unit bought you a pension of 2.5p per week.  The graduated retirement benefit unit amount was frozen at £0.025 per week until 1978 and then started to be adjusted with inflation each year from 1978.

Example of Graduated Pension Scheme Calculation

• A man has paid in via National Insurance to the Graduated Scheme £375, he will have accrued 50 units.  This pension will then be paid at 50 units X the current graduated retirement benefit unit price.  

• The current graduated retirement benefit unit price for 2012/13 is £0.1251 per week and for 2013/14 is £0.1279 per week.

• Originally, the maximum number of unit credits that could be held in a persons name was 86 for a man and 72 for a woman.  With Effect April 2010 - the number of units that can be held for women increased to that for a man i.e 86 units.

• Therefore, the maximum graduated pension for all = Maximum number of Graduated pension units of 86 X current unit weekly pension £0.1279 = £11.00 per week. 

Contracting Out of the Graduated Scheme

Some pension schemes were allowed before 1975 to contract out (much in the same way as people have contracted out of SERPS and S2P).  These benefits are known as Equivalent Pension Benefits (EPB's).

The State Graduated Pension Scheme ended in 1975, SERPS has also ended as the more recent second tier State Second Pension (S2P).  This also means that 'contracting out' has ended (with the exception of some company style/public sector pension schemes.

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