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SERPS & Contracting out
Some or all of your existing pension plan may be SERPS (State Earnings Related Pension Scheme), now called the S2P (State Second Pension) or sometimes referred to as ‘Protected Rights’ or ‘Contracted Out Benefits’.
Whatever the jargon, they all refer to the same thing and for the purposes of this explaining them; we will refer to them as SERPS.
You are probably aware that everyone is entitled to the Basic State Pension which is a whopping £7,500 per annum for a couple, or around £4,500 for a single person. We all accrue the State Pension by paying our ‘Stamp’ or Basic National Insurance Contributions, which is a flat rate for all.
Back in the seventies there was a bit of an argument about why Bob who has earned good money all of his life and paid lots of tax should get the same state pension as Jack who didn’t work for long periods and only paid nominal amounts of tax when he did work.
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To counter this, they came up with SERPS, which is effectively a top-up pension for the basic state scheme. Contributions to SERPS are paid for by an increase in National Insurance Contributions. As NI contributions are taken as a percentage of your salary, the more you earn the higher the contributions; the higher the contributions, the higher your final pension should be. SERPS contributions were paid into the government scheme with a view to providing this additional income in retirement. The government decided however, to let you ask your own personal pension provider to invest your SERPS monies, along with any other private pensions. This was known as ‘contracting out’. In the 80’s and early 90’s when contracting out was prevalent, the entire Financial Services sector was unregulated. This meant that anyone could sell these plans, and sell them they did! Consequently many people opted out of SERPS and their monies accrued alongside their private scheme. |
The contributions were still collected by HMRC from National Insurance payments although they were then rebated to whichever pension provider that you had nominated.
Over the years, changes were made to the SERPS scheme and in 2002 it was replaced by the State Second Pension (S2P). Due to the changes, contracting out became less advantageous and currently there are very few situations where continuing to contract out is suitable.
However, those contributions that have been accrued within private contracted out plans remain outside the government scheme. At retirement you will be able to purchase an annuity in the same way as with your normal personal pension.
It is therefore imperative that you review these plans regularly and make any transfers or adjustments where necessary as they may form a large part of your overall income in retirement.
If you have an old or frozen pension plan then you should have it reviewed by the qualified experts.
You may be able to:
- Increase the value of your pension
- Unlock your pension
- Consolidate your plans
- Save £thousands in pension charges
- Access better performing funds
- Release tax free cash from your plan
- Receive an immediate income
