SERPS and the Second State Pension

The State Second Pension and the State Earnings Related Pension Scheme (SERPS) is how the additional State Pension was previously referred to. National Insurance contribution assessments determine the extra amount to which any individual may or may not be entitled.

State Earnings-Related Pension Scheme (SERPS)

State Pension for employees was known as the State Earnings-Related Pension Scheme (SERPS) prior to April 2002. An individual’s SERPS pension amount was determined in accordance with their:

  • National Insurance contributions
  • Annual earnings

Inheriting SERPS from a spouse or civil partner

When a person dies, the date of their birth will determine the potential SERPS inheritance for their partner – as illustrated in the table below:

Maximum possible spouse or civil partner’s SERPS inheritance

Man’s date of birth Maximum percentage of SERPS pension that the man’s wife or civil partner can inherit
5 October 1937 or before 100%
Between 6 October 1937 and 5 October 1939 90%
Between 6 October 1939 and 5 October 1941 80%
Between 6 October 1941 and 5 October 1943 70%
Between 6 October 1943 and 5 October 1945 60%
6 October 1945 and after 50%

 

Woman’s date of birth Maximum percentage of SERPS pension that the woman’s husband or civil partner can inherit
5 October 1942 or before 100%
Between 6 October 1942 and 5 October 1944 90%
Between 6 October 1944 and 5 October 1946 80%
Between 6 October 1946 and 5 October 1948 70%
Between 6 October 1948 and 5 July 1950 60%
6 July 1950 and after 50%

 

Regardless of the above, the government imposes limits on State Pensions with regards to how much extra a person is entitled to receive. This is calculated by combining inherited additional pension with personal additional pension, with the upper-limit being revisited, altered and applied every year. In the year beginning April 6 2015 and ending April 2016, additional State Pension limits are set at a weekly maximum of £164.36.

State Second Pension

The State Second Pension became the new definition of additional State Pension as of April 2002. The government brought in the State Second Pension as a means by which to better assist those on lower to medium incomes, along with the disabled, those with long-term illnesses and those with dependents – i.e. caregivers.

Spouse or civil partner inheritance of the State Second Pension

When a person dies, a maximum of 50% of their State Second Pension may be passed on to their surviving civil partner, widow or widower. The government also sets a limit on exactly how much additional State Pension any individual may inherit. Inherited additional pension combined with personal additional pension is used to assess entitlement. Again, upper limits are changed on an annual basis.

Additional State Pension

Are you entitled to additional State Pension, or have you been contracted out?

Understanding the additional State Pension

National Insurance contributions determine whether and to what extent an individual is entitled to additional money on top of their standard state pension – this is what’s referred to as additional State Pension. The information is relevant to women born prior to April 6 1953 and men born before April 6 1951.

Who receives the additional State Pension?

If you are below the current state pension age, you may be building a credit for additional State Pension contributions if you are:

  • In work and earned in excess of £5,772 for the 2014/2015 financial year.
  • Claiming child benefit while caring for children under the age of 12.
  • Spending a minimum of 20 hours each week caring for a disabled or sick individual and receiving Carer’s Credit.
  • Registered as a foster carer and receiving Carer’s Credit.
  • Disabled or sick and are receiving other specific benefits.

If you have a pension and are currently employed, there’s a chance you may have been ‘contracted out’ and will be exempt from any additional State Pension. You’ll find more information about contracting out below.

SERPS and the State Second Pension

State Earnings-Related Pension Scheme (SERPS) used to provide additional State Pension prior to the introduction of the new additional State Pension initiative. In order to calculate additional State Pension entitlement, the respective individual’s earnings are assessed in accordance with changes to average earnings.

Inheriting additional State Pension

In the event that an individual dies, their additional State Pension may be passed on to their spouse or civil partner in the form of inheritance.

Contracting out of the additional State Pension

As introduced a little earlier, the concept of being contracted out of additional State Pension may apply to those who are employed and have pensions. As of the 2014/2015 financial year, those earning in excess of £5,772 were given the option of joining private pensions instead of remaining with the additional State Pension option – a move referred to as being ‘contracted out’. It is not however possible to exit the basic State Pension under any such circumstances.

Those to whom this may be applicable are advised to speak to their employers in order to find out the specifics of their workplace pension and whether or not they are contracted out.

Who is not entitled to additional State Pension?

There are various scenarios where contributions or credits do not necessarily lead to additional State Pension entitlement. Examples of such periods include the following:

  • Any time during which you are self-employed and so are inherently contributing less to National Insurance.
  • Any time you spend out of employment.
  • Any time you spend in full-time training or education.

Basic State Pension contributions may continue even during periods when you are not employed or working, though what would normally constitute additional State Pension credits do not apply during such times. The only exceptions to the rule being in instances where disability or illness is the cause of the period of unemployment, during which times additional State Pension credits may be earned if certain specific criteria are met.

Additional State Pension Amounts

Specific additional State Pension amounts are not fixed, but are rather calculated in accordance with:

  • The National Insurance contributions you’ve made over the years.
  • How much you have earned over the years.
  • Any periods during which you were contracted out.

For the financial year beginning April 6 2015 and ending April 5 2016, additional State Pension maximums have been set at £164.36 per week. Nevertheless, this is the maximum weekly additional payment permitted which means most individuals may not in fact receive this exact amount.

Claiming the additional State Pension

Those who are entitled to additional State Pension generally do not need to do anything in order to receive it, as it will be automatically paid out as standard just as soon as their basic State Pension payments begin. There are however helpful governmental resources available should you have any uncertainty as to your entitlement.

When can I claim the additional State Pension?

As is the case with basic state pension payments, additional State Pension is paid when a person reaches the applicable state pension age at the time. This will be determined in accordance with the year of your birth and governmental policies at the time – you can find out the current state pension age that applies to you personally online.

How additional State Pension is increased

As prices increase, so too may certain elements of the State Pension, including the State Second Pension, State Earnings-Related Pension Scheme, Graduated Retirement Benefit and additional State Pension received when State Pension claims are deferred.

Prior to reaching the official State Pension age, any State Second Pension (SERPS) accrued is likely to increase in accordance with earnings averages – referred to as ‘revaluation’.

State Pension Statements

How can I get a State Pension statement?

You may not be provided with a State Pension statement as standard, which means it is in your best interests to request one. This incredibly useful document will assist you in planning ahead and evaluating your finances, ultimately helping you decide whether or not you will have enough money to facilitate your lifestyle long-term, or whether further savings and contributions will be required.

What does a state pension statement include?

Your personal State Pension statement features essential information with regard to the pension you are most likely to begin receiving as soon as you reach the current specified State Pension age.