What Is SERPS? The State Earnings-Related Pension Scheme

The State Earnings-Related Pension Scheme, known as SERPS, was a component of the UK state pension system. It provided an additional layer of state pension income for individuals, supplementing the basic state pension with a benefit tied to a person’s earnings during their working life. Understanding SERPS can help individuals comprehend their past pension contributions and how they contribute to current state pension entitlements.

Understanding SERPS

SERPS was established as an additional state pension, designed to provide an earnings-related top-up to the basic state pension. This government-run scheme operated between April 6, 1978, and April 5, 2002. It was replaced by the State Second Pension (S2P) in 2002, which later transitioned into the new State Pension in 2016.

Eligibility for SERPS generally included employed individuals who paid Class 1 National Insurance contributions. Self-employed individuals were not eligible to accrue SERPS entitlement. The scheme aimed to increase retirement income for those who qualified, based on their earnings history. It was considered a second tier of the state pension system before the changes introduced in 2016.

How SERPS Worked

SERPS entitlement was accrued based on an individual’s earnings that fell between a lower and an upper earnings limit. Contributions were made through Class 1 National Insurance (NI) payments. The amount of SERPS pension an individual could receive was calculated as a percentage of their relevant earnings.

Initially, the benefit was calculated as 1.25% of “middle band earnings” for each year of contributions, with a maximum of 25% of earnings over 20 years for those retiring before April 6, 1999. Earnings were revalued annually in line with national average earnings to maintain their value. Changes introduced by the Social Security Act 1986 reduced the target SERPS pension from 25% to 20% of average earnings between the lower and upper limits. This reduction applied to accrual from April 6, 1988. The calculation considered earnings for each tax year, with specific divisions applied to surplus earnings depending on the period.

Contracting Out of SERPS

“Contracting out” was a feature of SERPS that allowed some individuals and their employers to opt out of the additional state pension. This option was available if an individual was part of an approved occupational pension scheme or a personal pension. The reason for contracting out was to redirect National Insurance contributions into a private pension arrangement instead of building SERPS entitlement.

Financial implications included reduced National Insurance contributions for both the employee and their employer. In exchange for these lower contributions, the private pension scheme was expected to provide an equivalent level of benefit. Individuals would build up private pension rights within their chosen scheme. These private pension funds were often referred to as “protected rights pensions,” though this designation was abolished in 2012. Contracting out was initially available for final salary schemes, and later extended to money purchase or defined contribution schemes in 1988. Contracting out fully ceased on April 5, 2016, with the introduction of the new State Pension.

SERPS and the Current State Pension

SERPS ceased to accrue new entitlement on April 5, 2002, when it was replaced by the State Second Pension (S2P). S2P aimed to provide a more generous additional state pension for low and moderate earners, and extended eligibility to certain carers and individuals with long-term illness or disability. S2P itself was then replaced by the new State Pension on April 6, 2016.

Any SERPS entitlement built up before April 2002 remains valid and forms part of an individual’s overall state pension. For those who reached State Pension age before April 6, 2016, their pension is typically made up of both the basic and additional State Pension components. For individuals who reach State Pension age on or after April 6, 2016, past SERPS contributions are factored into the calculation of the new State Pension. This integration is handled through a “foundation amount” calculation within the new State Pension system. A “Contracted Out Pension Equivalent” (COPE) amount is included in State Pension forecasts. This shows the equivalent of the additional state pension that would have been received if an individual had not contracted out. This ensures that past contributions, or the lack thereof due to contracting out, are accounted for in the current pension entitlement.

Checking Your SERPS Entitlement

Individuals can find out their specific SERPS entitlement by obtaining a State Pension forecast. This forecast provides information on how much State Pension an individual could receive and when they can get it. The forecast typically details both the basic State Pension and any additional State Pension, which includes accrued SERPS and S2P.

The quickest way to obtain a State Pension forecast is by using the online service on the Gov.uk website. Users can sign in to check their forecast, which provides a summary of predicted amounts on a weekly, monthly, and yearly basis. Alternatively, individuals can contact the Future Pension Centre by phone or complete and mail a BR19 application form.