SERPS Pension Explained
If you contributed towards a SERPS pension between 1978 and 2002, you might be due a top up to your state pension. Alternatively you may have contracted out of SERPS, and seen your National Insurance contributions paid into a workplace or private pension instead.
SERPS is short for the State Earnings Related Pension Scheme, a scheme which provided a way for employees to top up their state pension entitlement. It hasn’t been possible to pay into a SERPS pension since 2002, but if you worked before then, and didn’t contract out, your state pension income could still be enhanced because of the SERPS pension payments you made previously.
What is a SERPS pension?
A SERPS pension is a scheme that you could have paid into in order to qualify for the additional state pension which is paid out on top of the basic state pension. Contributing into SERPS was an option from 1978 through to 2002 as a way of topping up your state pension if you were employed and earnt enough to pay Class 1 National Insurance contributions (NICs) above the annual lower earnings limit.
To give you an idea of what you needed to earn to build an entitlement to a SERPS pension, the lower earnings limit gradually increased from £910 a year in the 1978/79 tax year to £3,744 by 2001/02.
If you were self-employed, you wouldn’t have been eligible to pay into SERPS.
» MORE: All about the state pension
What happened to the SERPS pension?
SERPS was replaced with the state second pension (S2P) in 2002 to give both employed workers and those in receipt of certain benefits the chance to enhance the income they would receive from the state pension. However, it still wasn’t an option for the self-employed.
It hasn’t been possible to pay towards the S2P since the introduction of the new state pension in 2016.
Contracting out of SERPS
The accrual of additional state pension benefits stopped during any period of time you were contracted out of SERPS, or the S2P.
By being contracted out, the National Insurance contributions made by you and your employer that built your eligibility towards additional state pension would be lowered or paid into a workplace or private pension instead, in the hope that this could deliver a higher level of pension benefits.
Defined contribution schemes
If the redirected NICs went into a defined contribution scheme, such as a personal pension, these were ringfenced as ‘protected rights’ that may have some restrictions as to how they could be utilised at retirement.
If you had protected rights, these would have become standard pension benefits in 2012 when contracting out ceased to be an option for defined contribution schemes.
Defined benefit schemes
Alternatively, if your contracted out payments went towards a defined benefit or final salary scheme, guarantees were attached that they must deliver a certain minimum level of benefit similar to what the additional state pension would have paid if you had remained contracted in. These were often referred to as a guaranteed minimum pension or reference scheme test benefits.
The option to contract out through a final salary scheme ended when the new state pension was introduced in April 2016.
How is a SERPS pension paid out?
This will depend on your state pension age and the type of state pension you’re eligible for.
If you reached state pension age before 6 April 2016, you qualify for the old basic state pension and may be eligible to receive an extra payment in the form of additional state pension. This additional payment will reflect any SERPS entitlement you accrued up until 2002 and any entitlement you built up for the state second pension thereafter.
If your state retirement age falls after 6 April 2016, you qualify for the new state pension rather than the old basic state pension. The idea behind the new state pension was to simplify the system into a single-tier flat-rate payment, with no separate additional state pension payment. For 2022/23 the new state pension pays £185.15 a week if you qualify for the full amount. However, if you’ve built up entitlement to a certain level of additional state pension, your new state pension could be increased to reflect this.
Any SERPS pension or S2P benefits you’re entitled to will be paid automatically when you claim your state pension. Once your claim is underway, the Pension Service will let you know how much your payment will be for. Everything is paid at the same time into your chosen bank account.
How much is a SERPS pension?
The maximum additional state pension you can receive in the 2022/23 tax year is £185.90 a week. This includes any entitlement you might have to both SERPS and S2P, and any additional state pension you might inherit.
Exactly how much you might get will depend on the number of years you paid NICs, the level of your earnings when this was paid, and whether you spent any time contracted out of SERPS or the S2P. Any top up you made to your basic state pension – an option that was available from October 2015 to April 2017 – will also be included.
Inheriting a SERPS pension
If your spouse or civil partner has passed away, you might be allowed to inherit some of their SERPS pension entitlement.
How much you can inherit will depend on whether they died before or after 6 October 2002.
If it was before, you’re entitled to inherit all of their SERPS pension; if it was on or after, the SERPS you can inherit will depend on when they were born:
The maximum state second pension that you can inherit is always 50%.
How do I check my SERPS pension?
A pension forecast will give you an idea of how much state pension you’re currently in line to receive, including any SERPS pension you’re eligible for.
If you’re not sure whether you were contracted out or not, looking at your payslips or asking your employer or pension provider are usually a good SERPS pension check. Alternatively, if your state pension forecast includes a contracted-out pension equivalent (or COPE) estimate – which shows the amount of additional state pension you would have received if you hadn’t contracted out – then it follows that you were contracted out at some point.
If you were contracted out, but aren’t sure where these payments went or are currently held, there are various ways you can trace pensions, whether they include SERPS or not.
» MORE: Find your lost pensions
Can I cash in my SERPS pension?
If you have an entitlement to SERPS that is being (or will be) paid out as part of your state pension, cashing in or taking a SERPS pension lump sum is not an option.
However, if you ever contracted out of SERPS and so had a separate pot of protected rights funds in a private or workplace pension you can cash this in. Since these will have become ordinary pension benefits, protected rights are potentially available to access once you reach age 55.
» MORE: Accessing your pension benefits
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Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more