What is SERPS?

Depending on your individual circumstances, you may be entitled to additional State Pension. As its name suggests, additional State Pension is paid in addition to the basic State Pension.

Up to April 2002, the additional State Pension was called the State Earnings-Related Pension Scheme (SERPS). SERPS was based on your record of National Insurance contributions and your level of earnings as an employee.
On 6 April 2002, the State Second Pension reformed SERPS to provide a more generous additional State Pension for low and moderate earners, and certain carers and people with long-term illness or disability. (Any SERPS entitlement already built up is protected both for those who have already retired and for those who have not yet reached State Pension age.)

Our advisers are ready to help you with your serps enquiry

The State Second Pension gives employees earning up to £26,600 (in 2004/05 terms) a better pension than SERPS, whether or not they are contracted out into a private pension, with most help going to those on the lowest earnings (up to around £11,600 in 2004/05 terms).

If you are an employed earner with annual earnings above a certain amount (£4,108 in 2004/05) you can choose to leave the additional State Pension and join a private pension scheme instead. This is called 'contracting out'. If you choose to contract out by joining your employer's contracted-out occupational pension scheme, both you and your employer will pay lower, reduced rate National Insurance contributions. When you retire, your second pension will come from your employer's scheme and not from the additional State Pension. You can also contract out with a stakeholder pension or a personal pension. If you do this, instead of paying lower National Insurance contributions, once a year the Inland Revenue will pay directly into your pension a rebate of your National Insurance contributions.

You may still need to think about whether this will be enough to support the lifestyle you want when you retire. You can also join a Stakeholder Pension scheme or a personal pension scheme without contracting out of the additional State Pension. You will usually get tax relief on your contributions to a private pension scheme. With a basic rate of income tax of 22 per cent, every £100 that goes into your pension costs you £78 (based on the tax year 2004/05). If you pay income tax at the higher rate of 40 per cent, every £100 that goes into your pension fund costs you £60 (based on the tax year 2004/05).

If you are not sure what is the best choice for you, you may want to get further help. If you want to know more about state pensions or any other pension arrangements please complete our enquiry form and we’ll arrange for an independent pension specialist to contact you to discuss your individual circumstances.

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