The State Earnings Related Pension Scheme, or SERPS for short, allowed workers to increase their state pension benefits. Although SERPS pension payments have not been accepted since 2002, if you worked prior to that year and did not contract out, your state pension income may still be increased as a result of your prior SERPS pension payments.
Navigating the complexities of UK pensions can be challenging, especially when dealing with older schemes like SERPS (State Earnings-Related Pension Scheme). This guide aims to clarify what happens when you opt out of SERPS and how it affects your retirement income.
What is SERPS?
SERPS, active between 1978 and 2002, allowed employees to contribute towards a top-up on their state pension. This scheme was replaced by the State Second Pension (S2P) in 2002, offering similar benefits to both employed individuals and certain benefit recipients. However, neither scheme was available to the self-employed.
Opting Out of SERPS:
During your working life, you may have opted out of SERPS. This meant that the National Insurance contributions (NICs) typically used to build your SERPS entitlement were redirected elsewhere. These contributions could have been:
- Lowered: Your employer and you would pay reduced NICs, potentially impacting your future state pension income.
- Redirected: Your NICs could have been directed towards a workplace or private pension scheme instead.
What Happens to Your Contributions When You Opt Out?
If your redirected NICs went into a defined contribution scheme (such as a personal pension), these contributions were considered “protected rights.” These rights may have restrictions on how they can be utilized at retirement. However, these protected rights became standard pension benefits in 2012 when contracting out ceased for defined contribution schemes.
Alternatively, if your contributions were directed towards a defined benefit scheme (final salary scheme), guarantees were attached to ensure they delivered a minimum level of benefit similar to what the additional state pension would have provided had you remained contracted in. These were often referred to as a guaranteed minimum pension (GMP) or reference scheme test benefits. The option to contract out through a final salary scheme ended with the introduction of the new state pension in April 2016.
Impact of Opting Out on Your State Pension:
The impact of opting out on your state pension depends on your state pension age and the type of state pension you’re eligible for:
- State Pension Age before 6 April 2016: You qualify for the old basic state pension and may receive an additional payment in the form of the additional state pension. This payment reflects your accrued SERPS entitlement and any S2P entitlement built up later.
- State Pension Age after 6 April 2016: You qualify for the new state pension, a single-tier flat-rate payment without a separate additional state pension. However, if you built up entitlement to a certain level of additional state pension, your new state pension could be increased to reflect this.
How Much State Pension Will You Get?
The maximum additional state pension you can receive in the 2024/25 tax year is £218.39 a week. This includes any entitlement you might have to both SERPS and S2P, and any additional state pension you might inherit. The exact amount you receive depends on:
- Number of years you paid NICs: The longer you contributed, the higher your potential entitlement.
- Earnings level: Higher earnings typically translate to a higher state pension.
- Contracting-out periods: Any time spent opted out of SERPS or S2P will reduce your entitlement.
- Top-ups to basic state pension: Voluntary top-ups made between October 2015 and April 2017 are also included.
Inheriting SERPS Pension:
If your spouse or civil partner passed away before 6 October 2002, you can inherit all of their SERPS pension entitlement. If they passed away on or after this date, the amount you can inherit depends on their birthdate. The maximum state second pension you can inherit is always 50%.
Finding Your Lost Pensions:
If you’re unsure where your contracted-out SERPS contributions went, you can use various methods to trace your pensions. This includes contacting your former employers, checking old payslips, or using government resources like the Pension Tracing Service.
Accessing Your Pension Benefits:
You cannot cash in or take a lump sum from your SERPS pension entitlement that is being paid as part of your state pension. However, if you opted out of SERPS and have a separate pot of protected rights funds in a private or workplace pension, you can potentially access these funds once you reach age 55 (rising to 57 on 6 April 2028).
Opting out of SERPS could have impacted your state pension income. However, understanding your contributions, potential entitlements, and options for accessing your pension benefits can help you make informed decisions about your retirement planning. Remember, seeking professional advice from a financial advisor can further assist you in navigating the complexities of your individual situation.
How much is a SERPS pension?
In the 2023–2024 tax year, the maximum additional state pension you are eligible to receive is £204. 68 a week. This covers any potential eligibility for both S2P and SERPS benefits, as well as any potential inheritance of additional state pension. The amount you could receive will vary depending on how long you paid NICs, how much you were earning at the time, and if you were ever contracted out of SERPS or the S2P. Included will also be any additions you made to your base state pension, which you could do between October 2015 and April 2017.
Should your spouse or civil partner pass away, you may be eligible to receive a portion of their SERPS pension.
It will depend on whether they passed away before or after October 6, 2002, how much you can inherit.
You can inherit the full amount of their SERPS pension if it happened before; if it happened on or after, the amount of SERPS you can inherit will depend on when they were born:
| Man’s birth date | Woman’s birth date | SERPS that you can inherit |
|---|---|---|
| 5 October 1937 or earlier | 5 October 1942 or earlier | 100% |
| From 6 October 1937 to 5 October 1939 | From 6 October 1942 to 5 October 1944 | 90% |
| From 6 October 1939 to 5 October 1941 | From 6 October 1944 to 5 October 1946 | 80% |
| From 6 October 1941 to 5 October 1943 | From 6 October 1946 to 5 October 1948 | 70% |
| From 6 October 1943 to 5 October 1945 | From 6 October 1948 to 5 July 1950 | 60% |
| From 6 October 1945 onwards | From 6 July 1950 onwards | 50% |
The highest state second pension you can ever inherit is always 20%500%.
How is a SERPS pension paid out?
When you file for your state pension, any SERPS pension or S2P benefits to which you are eligible will be paid automatically. When your claim is processed, the Pension Service will notify you of the amount that will be paid to you. Everything is deposited simultaneously into the bank account of your choice.
How ‘Contracting out’ affects your UK State Pension
FAQ
What happens if I have opted out of SERPS?
Will I get full State Pension if I was contracted out?
What is contracted out pension equivalent?
What is the history of SERPS?