SERPS was introduced four decades ago in 1978 as a top-up to the basic state pension. The amount you’d receive from SERPS was related to 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 replaced by the State Second Pension.
When SERPS was originally introduced, the maximum benefit under the scheme was 25% of your earnings. In 1988 the benefit calculations changed, and the maximum benefit was reduced to 20% of average earnings.
Opting Out of SERPS
Many people chose 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 contracted out of SERPS your National Insurance contributions were:
Lower than people paying into SERPS
Paid into another pension, for example a private pension
Pensions built up from National Insurance rebates are known as ‘protected rights’ pensions. Initially, 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 people belonging to defined benefit or final salary schemes were contracted out and paid a lower rate of National Insurance Contributions. Anyone belonging to 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 ended in April 2016.
Those who worked 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 working in other professions. You can find out if you were contracted out by contacting the HMRC, we explain how in this mis-sold SERPS blog post.
What happens at retirement?
If you’re entitled to SERPS, you’ll start receiving it once you reach state pension age. If you retired before April 2016, then you’ll receive both the basic and the additional state pension. Anyone retiring after this date will get a single payment made up of the basic and additional state pension.
There’s no set 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. Seek 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 boost your State Pension income either by continuing to work, or by claiming National Insurance credits. You might be eligible 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 the age of 55 (rising to 57 from 2028 ). 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 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.
You can read all about your retirement options in our handy guide.