State Second Pension
On 6 April 2002, the Labour Government introduced the State Second Pension to provide a more generous additional state pension for UK workers. The main aim was to enhance retirement benefits for low and moderate earners, and to extend access to include certain carers and people with long-term illness or disability.
Up to April 2002, the additional state pension was called the State Earnings-Related Pension Scheme (SERPS). SERPS was based on your record of National Insurance contributions and the level of earnings as an employee. (Any SERPS entitlement already built up is protected both for those who have already retired and for those who have not yet reached State Pension age.)
The State Second Pension gives employees earning up to £27,800 (in 2005/06 terms) a better pension than SERPS, regardless of whether they are contracted out into a private pension, with most help going to those on the lowest earnings (up to around £12,100 in 2005/06 terms).
When there is a claim for a State Pension any additional State Pension due to you will also be calculated.
Contracting out
If an employed earner with annual earnings above a certain amount (£4,264 in 2005/06) he or she cannot leave the basic State Pension. However, if they wish they can choose to leave the additional State Pension and join a private pension scheme instead. This is called 'contracting out'.
If chosen to contract out by joining your employer's contracted-out occupational pension scheme, both the employee and the employer will pay lower, reduced rate National Insurance contributions. When the employee retires the second pension will come from the employer's scheme and not from the additional State Pension. Although, most people will continue to build up a small entitlement to the additional State Pension as well.
A person can also contract out with a stakeholder pension or a personal pension. If they do this, instead of paying lower National Insurance contributions, once a year HM Revenue & Customs will pay directly into their pension a rebate of your National Insurance contributions. The rebate is intended to provide benefits broadly the same as the additional State Pension given up.
One can also join a stakeholder pension scheme or a personal pension scheme without contracting out of the additional State Pension, but if this is done, they won't get the rebate.
the person will usually get tax relief on the contributions to a private pension scheme. With a basic rate of income tax of 22 per cent, every £100 that goes into the pension costs £78 (based on the tax year 2004/05). If ythey pay income tax at the higher rate of 40 per cent, every £100 that goes into your pension fund costs you £60 (based on the tax year 2004/05).
Some occupational schemes and some personal pensions are organised on a 'rebate-only' basis. This means that the only money being paid into the scheme is your National Insurance contributions rebate.
If they have chosen this sort of second pension, it will give them roughly the same pension one would get from the additional State Pension. one may still need to think about whether this will be enough to support the lifestyle he or she wants when they retire.
Help for lower earners
From 6 April 2003 the State Second Pension gives employees earning up to £27,800 (in 2005/06 terms) a better pension than SERPS, regardless of whether they are contracted out.
Most help goes to those who earn less than £12,100 from 12 April 2004.
A person contributing to a contracted-out personal pension earning less than £12,100 from 12 April 2004 in a tax year will also get a State Second Pension top-up for that year. The top-up reflects the more generous additional State Pension provided by State Second Pension.