There are two parts to the State pension: the basic State pension and an additional pension, or State Second pension (S2P). The additional pension acts as a top-up to the basic State pension, for employees boosting their income in retirement. The S2P reflects an employee’s earnings throughout their working life.
The additional State pension used to be known as SERPS (State Earnings-Related Pension Scheme). This additional pension was linked to earnings and depended on the National Insurance Contributions paid. Self-employed people cannot build up a pension through the S2P or SERPS.
In 2002 SERPS was reformed so that low-to-medium earners received a more generous pension. It was also extended to carers and those with a long-term illness or disability. The reformed additional State pension is now known as the State Second Pension (or S2P).
Like it predecessor, the State Second Pension also provides a top-up to the Basic State Pension based on earnings. The State Second Pension allows employees on low-to-moderate salaries to build up a bigger pension than they would have earned under SERPS.
All employees contribute towards the State Second Pension, although they can make alternative arrangements by making contribution to a pension scheme which is contracted-out of the State Second Pension. These can be either an occupational or a personal pension scheme.
While you’re employed, you have the option to ‘contract-out’ of the State Second Pension. This means that you can ask that your NI contributions be redirected towards a company pension scheme, a personal pension or a stakeholder pension. These pension pots build up in a DC pension scheme through the rebates of NI contributions, any tax relief given and the returns from the pension fund’s investments. A contracted –out pension plan is separate from any other pension scheme and the pot of money built up is referred to as Protected Rights.
Some occupational pension scheme may already be contracted-out of the State Second pension. Check your scheme details to find out more.
The rules on contracting-out are changing – see below for more information.
What to expect
The amount you can expect to get with the State Second Pension will depend on your career average earnings. However to help the lower paid (and certain carers, and some ill or disable people) get a better State Pension those with annual earning below £13,900 are consider to have annual earnings of this amount, thereby increasing their entitlement.
Working out how much you are likely to get with a State Second pension is a complex procedure as your entitlement will depend on your earnings, the amount of National Insurance Contributions you have paid and the annually set upper and lower earning levels. Your financial advisor should be able to work out any entitlement you may have to the S2P.
How do I get the State Second Pension?
When you start to claim for a State Pension when you retire, any S2P you are entitled to will also be calculated for you and included in your pension payments.
The Government has made several key changes to the S2P. From April 2010 it will be extended to include parents caring for children and other carers. It is also being restructured and simplified with the current earnings-related element being gradually withdrawn. By 2030 the entitlement to the S2P will be based on a flat-rate basis to provide a weekly top-up to the basic State Pension.
From April 2012 employees will no longer have the option to contracting out the State Second Pension into a money purchase scheme [link]. Anyone contracted-out of the State Second Pension through a money purchase schemes will automatically be contracted-back into it. Only employees in contracted-out defined benefit schemes will remain contracted-out.