What is SERPS?

SERPS is the abbreviation of the State Earnings Related Pension Scheme, also known as the additional state pension, which has since been replaced by the State Second Pension.

We’re very aware that the above opening paragraph reads like pensions jargon. Here, we clarify how SERPS worked and what it means if you opted out of this scheme to help try and break the jargon down.

SERPS Background

SERPS was brought in four decades ago in 1978 as a top-up to the basic state pension. The amount you’d receive from SERPS was based on your earnings over your working life, and you’d only be eligible for the scheme if you were an employee making Class 1 National Insurance Contributions. Self-employed people were not eligible for SERPS. In April 2002, SERPS was changed to the State Second Pension.

When SERPS was first set up, the maximum benefit under the scheme was 25% of your earnings. In 1988 the benefit calculations were altered, and the maximum benefit was reduced to 20% of average earnings.

Opting Out of SERPS

Many people decided or were advised to opt out of SERPS and instead had their National Insurance rebates paid into a personal pension in the hope that this would provide them with better benefits at retirement. If you were someone contracted out of SERPS your National Insurance contributions were:

• Lower than people paying into SERPS
• Paid into an alternative pension, for example a private pension

Pensions derived from National Insurance rebates are known as ‘protected rights’ pensions. Originally, only those who belonged to defined benefit or final salary pensions could contract out of SERPS, but in 1988, the government allowed those in defined contribution or money purchase schemes to opt out as well. People were offered incentives to leave SERPS, so for the first five years, the government contributed an extra 2% of your earnings into a personal pension.

In April 2012, only individuals belonging to defined benefit or final salary schemes were contracted out and paid a lower rate of National Insurance Contributions. Anyone part of a defined contribution scheme will have been contracted back in, paying National Insurance at the full rate. Contracting out for those with defined benefit pensions finished in April 2016.

You can find out if you were contracted out by reading a SERPS guide sheet. Those employed in the public sector, for example, people working for the NHS, the police or the armed forces, are more likely to have been contracted out than people employed in other professions.

What Happens at Retirement?

If you’re entitled to SERPS, you’ll start receiving it once you get to state pension age. If you retired before April 2016, then you’ll obtain both the basic and the additional state pension. Anyone retiring after this date will get a single payment consisting of the basic and additional state pension.

There’s no fixed amount of additional state pension you’ll receive – the amount you’ll get depends on how much you earned, the number of years you made National Insurance contributions and whether you contracted out. Gain advice if you’re not sure how much you might get, or request a State Pension Forecast on the government official website. If you were contracted out and have a lower State Pension as a result, you may be able to increase your State Pension income either by continuing to work, or by claiming National Insurance credits. You might be entitled to claim credits if, for example, you left work for a while to bring up your children, or because you weren’t able to work due to illness.

If you did opt out of SERPS and have a protected rights pension, you can access this pension from turning the age 55. You can take the first 25% of this pension as a tax-free lump sum if you want to. After that, any withdrawals will be taxed at your current income tax rate. If you’re a basic rate taxpayer, that means you’ll be taxed at 20%, rising to 40% or 45% if you’re a higher or additional rate taxpayer.