Understanding how the State Second Pension (S2P) and the State Earnings-Related Pension Scheme (SERPS) works can be a struggle, but getting to grips with the basics is important as they can affect the amount of State Pension you are entitled to.
SERPS ran from 1978 until 2002, and if you paid in after 2002, it was known as the Second State Pension (S2P). If you retired before 6 April 2016, your pension will be made up of both the basic and additional State Pension, whereas if you retired after this date, you get a single payment, which includes both elements.
Before the new pension system came into force, these schemes were designed to enable employees to increase their basic State Pension entitlement. However, if you paid into these schemes during your working life they may still impact the amount you receive at retirement, depending on your employment history, earnings, and whether or not you ‘contracted out’.
Bear in mind that there are plenty of exceptions to the basic rules, and the system can be fiendishly complicated, so you may want to seek professional advice if you want help understanding how much you’re entitled to. Here’s what you need to know, and where to go for more information.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
Contents
- What is the State Second Pension and SERPS?
- Who qualifies for the State Second Pension or SERPS?
- Graduated Retirement Benefit
- How much extra could you receive in Additional State Pension?
- What does ‘contracting out’ mean?
- How do you check if you were contracted out?
- How contracting out worked
- Why might you be entitled to more/less than the ‘flat-rate’ new State Pension?
- An example of how contracting out affects your State Pension
- The impact of not contracting out
- The impact of contracting out for ten years
- Can you cash in your State Second Pension or SERPS?
- Can you inherit the State Second Pension or SERPS?
- How much State Pension are you entitled to?
- How can you increase your State Pension?
- Where to go for pensions help
What is the State Second Pension and SERPS?
Both are simply different names for the Additional State Pension, which is essentially a top-up to the basic State Pension. You can no longer build up entitlement to this top-up, but if you paid into either scheme in the past, they may still form part of the pension you receive at retirement, depending on your personal circumstances and working history.
As mentioned, between 1978 to 2002, the Additional State Pension was known as the State Earnings-Related Pension Scheme, or SERPS, before its name changed to the State Second Pension (S2P) in 2002. Under the schemes, you receive the basic State Pension, based on 30 years’ worth of National Insurance Contributions (NICs) or credits, which may be boosted by the Additional State Pension.
The last year the State Second Pension was available was 2015/16, so you cannot have built up any entitlement to the Additional State Pension from 6 April 2016.
Who qualifies for the State Second Pension or SERPS?
You had to be working to contribute to SERPS through your salary when it was in existence prior to 2002. However, when it changed to S2P, the number of people qualifying for the scheme widened to include those unable to work for particular reasons, as well as those on low incomes.
For example, you may have qualified as an employee if you were earning at least £113 a week (the lower earnings limit), or if you were caring for one or more children under the age of 12 and claiming child benefit. You also qualified for the State Second Pension if you were claiming carer’s allowance, or particular disability-related benefits.
If you were self-employed, though, or chose to contract out, you weren’t able to claim this basic State Pension top up.
Graduated Retirement Benefit
It’s important to note that before SERPS was introduced, the Graduated Retirement Benefit scheme provided earnings related pensions on top of the Basic State Pension. This scheme ran from 1961 to 1975, and only those who reached State Pension age before 6 April 2016 will ever receive Graduated Retirement Benefit. If you reach State Pension age after this date you receive the New State Pension, but if you built up Graduated Retirement Benefit this will be factored in when calculating your entitlement to the New State Pension.
How much extra could you receive in Additional State Pension?
The amount you receive in Additional State Pension is affected by whether or not you contracted out of SERPS or S2P at some stage during your working life. You may still receive this if you are entitled to the new State Pension, introduced from April 2016.
Sir Steve Webb, former Pensions Minister and consultant at LCP (Lane Clark & Peacock) said: “Broadly speaking, the new State Pension is paid instead of the old basic State Pension plus old SERPS or S2P. So, for example, in the past you might have received the full basic pension (currently £156.20) plus an amount of SERPS depending on earnings, etc, and now you just get the flat pension of £203.85.
“However, you may still receive some entitlement as a ‘transitional’ protection if, when the rules changed in 2016, you had already built up more than the flat rate. But you get no further accruals post 2016.”
- If you’re a man and were born before 6 April 1951, or if you’re a woman born before 6 April 1953, you’ll likely be claiming the basic State Pension already. The basic State Pension is based on 30 years’ worth of National Insurance Contributions or credits, and currently stands at £156.20 a week The maximum you can receive on top in Additional State Pension is £204.68 a week in the 2023/24 tax year, and this is paid separately into your account.
Steve Webb said: “But you would need to have worked every year for the best part of 40 years and earned consistently £50,000 a year in today’s money while never having been contracted out to qualify for the maximum £360.88 a week you could get.”
- If you’re a man born on or after 6 April 1951, or if you’re a woman born on or after 6 April 1953 new State Pension rules will apply to you. This is based on 35 years’ worth of NICS, and is currently £203.85 a week in the 2023/24 tax year. Any pension in excess of this amount is known as your ‘protected payment’ and you receive a single payment each week consisting of both your new State Pension and any protected payment.
What does ‘contracting out’ mean?
Before April 2016 it was possible for employees to ‘contract out’ of the Additional State Pension. This meant paying lower National Insurance Contributions (NICs) and effectively accepting lower or no Additional State Pension. Instead, the money saved was paid into an alternative workplace or personal pension scheme. The amount you ultimately receive depends on your pension’s underlying investment performance.
You may have been asked whether you wanted to contract out of the Additional State Pension (State Second Pension or SERPS) or contracted out automatically by your employer (see more below on how contracting out works). If you weren’t aware that you were automatically contracted out, you may not have known that you hadn’t built up any Additional State Pension. Or, it may be that you actively contracted out, but have since forgotten you made this choice and that it will affect your pension entitlement.
If you had access to a final salary, also known as a defined benefit pension scheme, and contracted out, both you and your employer paid less in National Insurance. If you worked for the Police, NHS, or the Armed Forces, for example, you may have been contracted out of a final salary pension. Contracting out was abolished for all but final salary or defined benefit pension schemes in April 2012, and was fully abolished from April 2016.
How do you check if you were contracted out?
If you’re unsure whether or not you were contracted out at some stage of your working life, you can check an old payslip or with your employer at the time. If you’ve lost details of previous pension providers, you could contact the Pension Tracing Service to find information on former workplace or personal pension schemes.
It’s worth reiterating that you’re more likely to have been contracted out if you worked in the public sector, such as for the NHS, local councils, the Police, or the Armed Forces, and had access to a final salary pension scheme.
How contracting out worked
The way contracting out works depends on the type of pension involved.
Workplace or personal pension
If you were employed and you and your employer paid into a personal pension (perhaps because they didn’t offer a workplace pension), it would have been your decision as to whether or not you contracted out. If you decided to do this, some of your NICs would have been rebated and paid into your personal pension.
If you were employed and your employer contracted out the pension scheme, you wouldn’t have had a choice about whether or not you were contracted out. If your employer decided to contract out, everyone who joined the pension scheme would have been contracted out as well.
In exchange for being part of a contracted out pension scheme, your employer would have to agree to provide a minimum level of pension. If they couldn’t do this, the scheme could not contract out.
Why might you be entitled to more/less than the ‘flat-rate’ new State Pension?
If you reach retirement age after April 2016, you receive the new State Pension at a so-called ‘flat-rate’ of £203.85 a week in the 2023/24 tax year. However, you may be entitled to more than this if you built up some Additional Pension entitlement under S2P or SERPS. Alternatively, you may receive less than the new State Pension in some circumstances. Steve Webb explained: “Broadly speaking, people who had been extensively contracted out for decades and don’t work many (or any) years post-2016 will probably be short of the full rate.”
An example of how contracting out affects your State Pension
The following scenarios illustrate the potential impact of contracting out on your State Pension entitlement, but bear in mind that everyone’s circumstances are different, and you may receive more or less than this, depending on your individual situation.
Here, we’ve taken a fictional example of Emma, a woman who has been employed on average earnings all her working life and who reached State Pension age in April 2021, the amount she receives depends on whether or not she was contracted out during her working life. We are assuming that Emma has a full record of National Insurance contributions, and that she began working in 1978.
The impact of not contracting out
The amount Emma would get when she reached State Pension age would be assessed under both the old and new systems and she would receive the higher of the two amounts as her state pension.
Under the old state pension system, she would get £137.60 a week in basic State Pension. As she had not contracted out, she would also receive some Additional State Pension, made up of SERPS and the S2P.
For example, if she receives:
£55.23 a week in SERPS for the years from 1978 – 1997
£12.75 a week in SERPS for the years from 1997 – 2002
£37.57 a week in S2P for the years 2002 – 2016.
This adds up to £105.55 a week.
So, her basic State Pension would be £141.85 a week and on top of that she would receive £156.20 a week in Additional State Pension.
This works out at £261.75 a week.
Under the new State Pension system, she would get £203.85 a week if she has 35 years’ worth of NICs.
The way the system works is that Emma would receive the higher of the two amounts – so, £261.75 a week in State Pension.
The impact of contracting out for ten years
If we now take the same example (Emma, who has worked throughout her life, earning average earnings and reaching State Pension age in April 2016), but assume she was contracted out for ten years between 1978 and 1987, she’d receive a different amount.
Bear in mind that as she’s contracted out for 10 years, her National Insurance contributions during this period may have been paid into a personal or workplace defined contribution pension, which she can use to supplement her State Pension entitlement.
For example, if she receives:
£21.95 in SERPS between 1988 and 1997
£12.75 in SERPS between 1997 and 2002 and
£37.57 a week in S2P between 2003 and 2016.
This works out at £72.27 a week in additional pension, on top of her basic state pension of £156.20 a week.
So, under the old system, she would get £156.20 a week plus £72.27, which is £228.47 a week. The difference between this State Pension amount and the amount in the previous example, where the woman hadn’t contracted out, is £33.28 a week.
Under the new rules, she would get £203.85 a week, minus £33.28 a week, which would give £70.57 a week.
So, as the rules say you have to receive the higher of the two amounts (either the state pension you’d get under the old system or the state pension you’d get under the new system), she would get £228.47 a week.
Can you cash in your State Second Pension or SERPS?
No, you can’t cash in your Additional State Pension entitlement. You can only receive this along with your State Pension payments into your bank account, guaranteed for the rest of your life. However, if you contracted out, you can access the additional money that was paid into your defined contribution workplace or personal pension pot from age 55. You can do as you wish with this money from age 55, as with your other defined contribution pension savings. Find out more in our guide Your pension options at retirement.
Can you inherit the State Second Pension or SERPS?
You may be entitled to part of your spouse or civil partner’s Additional State Pension if they pass away. However, how much you can receive depends on whether this is made up of the State Second Pension or SERPS. You may inherit up to half, or 50% or your spouse or civil partner’s State Second Pension, but how much SERPS you can inherit is based on when they died. You can receive from 50% to all of their SERPS.
If your spouse or civil partner died before 6 October 2002, you can inherit up to 100% of SERPS. If your spouse or civil partner died after this date, the amount you can receive is based on when they were born. However, if you remarry or enter a new civil partnership before you reach State Pension age, you are unable to inherit a deceased spouse or civil partner’s SERPS entitlement.
| Date of birth (men) | Date of birth (women) | Percentage that can be inherited |
| 5/10/1937 or earlier | 5/10/1942 or earlier | 100% |
| 6/10/1937 to 5/10/1939 | 6/10/1942 to 5/10/1944 | 90% |
| 6/10/1939 to 5/10/1941 | 6/10/1944 to 5/10/1946 | 80% |
| 6/10/1941 to 5/10/1943 | 6/10/1946 to 10/1948 | 70% |
| 6/10/1943 to 5/10/1945 | 6/10/1948 to 5/10/1950 | 60% |
Learn more about what happens to the State Pension and other types of pensions when you die in our guide What happens to my pension when I die?
How much State Pension are you entitled to?
You can find out how much State Pension you’re on track to receive by requesting a State Pension statement, and you can find out when you’re eligible to claim your State Pension here.
Bear in mind that the State Pension age is under review and is gradually being pushed back so that it’s in line with rising life expectancy. It’s due to increase to 67 by 2029 and then again to 68 between 2037 and 2039.
Remember too that you don’t get your State Pension automatically – you have to actively claim it. You’ll usually be sent a letter a couple of months before you reach State Pension age which will tell you what to do. If you haven’t received a letter for some reason, or if you have misplaced it, you can also claim your State Pension online or over the phone. And remember – you can still claim your pension (or choose to defer it), even if you want to continue working. Find out more about deferring your State Pension in our article Deferring State Pension – How much can I get and is it worth it?
How can you increase your State Pension?
If your State Pension forecast isn’t what you’d hoped for, there are various ways you may be able to increase the amount you receive at retirement. You can find out more in our guide How the State Pension works.
For example, if you’re missing some NI qualifying years, you can buy extra years by paying ‘voluntary class 3 NI contributions’ to make up your record. However, you can usually only make up gaps from within the previous six years so there is a time limit for paying back qualifying years. Alternatively, you may be able to claim some National Insurance credits if you stopped working for a period to raise children, or look after ill relatives, for example. Before paying to increase your State Pension entitlement, however, check with the Department for Work and Pensions that it’s worth your while. Read more in our article Is it worth paying to top up your state pension?
As mentioned above, you can also defer your State Pension, which means you end up with a higher pension when you do start claiming it. Each year you postpone taking your State Pension increases the amount you receive by 5.8%. Find out more about this in our guide Deferring State Pension – How much can I get and is it worth it?
Bear in mind that your State Pension should rise each year in retirement, subject to the pension triple lock, although this is temporarily suspended. Find out more in our article What is the pension triple lock?
Where to go for pensions help
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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