If you were employed between 1978 and 2002 then you may well have generated an additional State Pension in the form of SERPS (the State Earnings Related Pension Scheme).

SERPS was introduced by the government on 6 April 1978 and was compulsory for all employees who made National Insurance contributions depending on their earnings. These contributions determined the size of the additional pension they received on retirement in addition to the basic State Pension.

SERPS ended on 5 April 2002 when it was replaced with the State Second Pension.

What was SERPS?

Any employees who paid full class 1 National Insurance contributions between 1978 and 2002 earned a SERPS pension. If you earned enough and paid employees’ National Insurance Contributions, you were automatically a member of SERPS in a process called ‘contracting in’.

The purpose of SERPS was to provide a pension related to your earnings, in addition to the basic state pension that everyone receives. The general principle was that everyone would receive a SERPS pension of 25 per cent of their earnings above a ‘lower earnings limit’ (generally the amount of the basic state pension). This amount was reduced to 20 per cent in 1986 and the change was phased in between 1999 and 2009.

There was also an ‘upper earning limit’ of roughly seven times the lower earnings limit, beyond which earnings were disregarded for National Insurance contributions and calculation of SERPS pensions.

The scheme was phased in over twenty years so that those retiring before 1998 received a SERPS pension proportional to the number of years’ worth of contributions they had made.

SERPS was related to earnings, so the amount your will get at your State Pension age will be different from other people.

Contracting Out of SERPS

When SERPS was established in 1978, employers who offered final salary pension schemes to their employers could opt to ‘contract out’ of SERPS as long as they gave the members of their occupational pension scheme a Guaranteed Minimum Pension.

As an incentive for opting out of SERPS, employees and employers would pay reduced National Insurance contributions and would earn virtually no SERPS pension.
Then, in 1988 members of money purchase pension schemes (personal pension plans) were allowed to opt-out of SERPS for the first time. Instead of providing a Guaranteed Minimum Pension these schemes had to pay the saving in National Insurance contributions into the private pension plan.

To encourage contracting out of SERPS, the Government made an extra incentive payment into each pension scheme if somebody contracted out using a personal pension plan.

State Second Pension

In April 2002, the additional State Pension was changed from SERPS to the State Second Pension. However, if you earned an additional State Pension through SERPS then this is protected irrespective of whether you have reached the State Pension age or not.

The idea of the State Second Pension is to make it more suitable for low and moderate earners, certain carers and people with a long-term illness or disability.