State Earnings-Related Pension Scheme

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The State Earnings Related Pension Scheme (SERPS) was a UK Government pension arrangement, to which employees and employers contributed between 6 April 1978 and 5 April 2002, when it was replaced by the State Second Pension.

Employees who paid full Class 1 National insurance contribution between 1978 and 2002 earned a SERPS pension. Members of occupational pension schemes could be "contracted out" of SERPS by their employer, in which case they and the employer would pay reduced NI contributions, and they would earn virtually no SERPS pension.

General principle[edit]

The purpose of the scheme was to provide a pension related to earnings, in addition to the basic state pension.

The principle was that everyone would receive a SERPS pension of 25 per cent of their earnings above a "lower earning limit" (approximating to the amount of the basic state pension). The scheme was phased in over twenty years so that those retiring before 1998 received a SERPS pension proportional to the number of years that they had made contributions to it. There was an "upper earning limit" of about seven times the lower earning limit, beyond which earnings were disregarded for NI contributions and calculation of SERPS pensions.

Under the Social Security Act 1986 the target SERPS pension was reduced from twenty five to twenty per cent of average earnings between the two limits. Pensions earned before 6 April 1988 were not reduced and the change was to be phased in for people retiring between 1999 and 2009.

Detailed calculations[edit]

  • The pension earned is calculated by taking the earnings between the lower earning limit and the upper earning limit in each tax year. This amount is referred to as ‘surplus earnings’.
  • These ‘surplus earnings’ are then increased in line with national average earnings until the individual reaches state pension age.
  • The earnings between 6 April 1978 and 5 April 1988 are then divided by 4 (to achieve the target of 25 per cent of earnings).
  • The earnings between 6 April 1988 and 5 April 2002 are multiplied by a factor depending on the tax year state pension age is reached:[1]
Tax year in which state pension age is reached (year ending 6 April) Percentage of total surplus earnings
2000 25.0
2001 24.5
2002 24.0
2003 23.5
2004 23.0
2005 22.5
2006 22.0
2007 21.5
2008 21.0
2009 21.5
2010 or later 20.0
  • The combined amount is divided by the number of complete tax years between April 1978 (or the first year in which the individual paid NI contributions if later) and the tax year the individual reaches state pension age.

Contracting out[edit]

When the scheme was established, employers with final-salary pension schemes could choose to contract-out of SERPS, provided they gave scheme members a Guaranteed Minimum Pension. In return for opting out of SERPS the employer would pay reduced National Insurance contributions.

In 1988 members of money purchase pension schemes were allowed to opt-out for the first time. Instead of providing a Guaranteed Minimum Pension these schemes had to pay the saving in National Insurance contributions into the pension arrangement. To encourage the take-up of this arrangement the government made an extra incentive payment into each pension scheme where somebody contracted out using this route.

After 2002[edit]

In April 2002 SERPS accrual ended and was replaced by the State Second Pension. The main reason for the change was to provide a larger pension to people of low earnings.

References[edit]

  1. ^ Pensions in Practice 2004/05, Income Data Services, London, April 2004.

External links[edit]