State Second Pension Scheme S2P 2002 2012

State Second Pension Scheme S2P - 2002 to 2012 - S2P RIP

State Second Pension S2P or as it used to be, the State Earnings Related Pension Scheme (SERPS), was technically scrapped with effect from April 2012.

This additional, second state pension is paid for by all employees as part of our National Insurance Contributions (NIC).  Self employed people pay less NIC and are not entitled to the second state pension.

Two State Pensions: Most people therefore have a State Pension and Additional State Pensions from old ‘Graduated’ NIC, SERPS and now S2P.  For some, this can mean state pensions in excess of £150-£200 per week.

Contracting Out - Many of you will have heard of the term ‘contracting out’.  This is where you opt out of the S2P and part of your and your employers NIC are paid into your own pension plan.  You may have seen the words “Protected Rights” or “Guaranteed Minimum Pension GMP” in your pension statement; this is contracted out NIC inside your pension pot.

By default, if contracting out of S2P is to be scrapped, then this means your company final salary pension may have to pay in more to make up the company pension shortfall or cut pension benefits or your company money purchase pension or personal pension fund will not grow as quickly as it will no longer received those “contracted out” National Insurance payments.

What this means is that whilst the State Pension weekly amount is increasing, many will lose State Second Pension/SERPS benefits and many will have to wait until age 68.

HISTORY LESSON OF WHAT S2P WAS......

Please note that the State Second Pension S2P replaced SERPS on 6 April 2002 and stopped on 5 April 2012.

• The State Second Pension S2P was a pension payable on top of your Basic State Pension provided you had paid adequate National Insurance Contributions.

• On the 6th April 2002 the State Second Pension replaced SERPS to provide a more generous additional second tier state pension for low and moderate earners, and certain carers and people with long-term illnesses or disabilities.  Any SERPS entitlement that has already been built up will be protected, both for those who have already retired and for those who have not yet reached state pension age.

• The State Second Pension gave employees earning up to and around £25,000 a better pension than SERPS would have done, with most help going to those on the lowest earnings of up to around £13,000.

• The State Second Pension, for the first time, covered certain carers and people with long-term illnesses or disabilities whose working lives have been interrupted or shortened.  They were able to build up an additional state pension for periods when they cannot work.

• If earned under a certain level of around £13,000 but more than the National Insurance lower-earnings limit then the State Second Pension rules treated you as if you had earned around £13,000.  The rate at which your additional state pension built up was greater than under SERPS.  This meant that you would get at least twice as much additional State Pension under the State Second Pension than you would have got under SERPS.

• If you were not in paid employment or you were working part-time and are on very low wages (under around £5,000 a year) because you were looking after a child under the age of six or a person with a long-term illness or disability, you were able to build up a State Second Pension.  This was because you got Home Responsibilities Protection.  If you qualified, you built up about £1 a week State Second Pension for every year you were a carer, which you will receive when you reach state pension age.

• If you were not in paid employment because you were ill or disabled, you may have built up a State Second Pension for each tax year that you were entitled to long-term Incapacity Benefit or Severe Disablement Allowance.  If you qualified, you will have built up about £1 a week State Second Pension for each year you were ill or disabled, which you will receive when you reach state pension age.  This will apply as long as when you reach state pension age you have worked and paid Class 1 National Insurance contributions for at least 1/10th of your working life since 1978.  This is called the ‘Labour Market Attachment Test’.

.....  State Second Pension Scheme S2P - 2002 to 2012 - RIP

2.  Contracting Out of the State Second Pension Scheme (S2P). 

The State Second Pension Replaced SERPS on 6 April 2002

You can choose to take out another kind of second pension and leave the State Second Pension at any time during your working life.  This is called ‘contracting out’.  You can do this by joining an occupational scheme (if your employer offers one), a stakeholder pension or a personal pension.

Contributions you have already made to the State Second Pension are protected and will give you an extra pension when you retire.  You can also re-join the State Second Pension if it suits you better.

You would need to consider your overall pension position in deciding whether to rejoin the State Second Pension.

If your occupational scheme, stakeholder pension or personal pension is not contracted-out, you can contribute to it as well as paying into the State Second Pension.

From the 6th April 2002 a member of a contracted out occupational pension scheme earning less than around £30,000 in a tax year will get a State Second Pension top up for that year.  A person contributing to a contracted out personal pension earning less than around £13,000 in a tax year will also get a State Second Pension top up for that year.

The top up reflects the more generous additional pension provided by the State Second Pension.

The decision as to whether or not to contract out of the State Second Pension is a very personal one and will depend on your age, views and attitude towards risk.  Also, the benefits of contracting out will depend on the investment growth and charges relating to your own pension. 

A certain investment return, net of charges will be needed in order for your contracted out pension to exceed the benefits from the State Second Pension.  If the assumed returns were lower than the amount needed, you would have been better off not contracting out.

Also, in the current climate of low interest rates, low equity markets and lower annuity rates, a larger fund is needed to provide the same benefits.  You may feel that the growth required just to match your State Second Pension return is unrealistic.

Protected Rights

You can personally contract out of the State Second Pension using a Personal or Stakeholder Pension.  This is sometimes known as Protected Rights.

The State Second Pension Replaced SERPS on 6th April 2002.

Speak to us about contracting out today.

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