What is the State Second Pension?

21-Oct-2009

Almost every UK resident can expect to receive a basic State Pension when they reach the age of eligibility for a State Pension).   The money to fund this Pension comes through taxation in the form of National Insurance Contributions (NICs).  



If you are employed and you are earning more than a certain amount each year, you also qualify for a State Second Pension (abbreviated to S2P), as long as you have been making your National Insurance contributions for the required number of years over the course of your working life. Unlike the basic State Pension, your second pension is directly linked to the amount of money that you personally earn, and therefore the amount of National Insurance contributions that you pay. 



The State Second Pension was introduced in 1978, to guarantee a reliable State-funded second tier pensions scheme to those on a lower rate of pay.  It was originally known as SERPS, or the State Earnings Related Pension Scheme.  In April 2002, SERPS was replaced by the State Second Pension.  If you were earning money before 2002, you will still receive any money that you accrued originally through SERPS up to April 2002 as a pension, but any money that you accrued after the change would be under the terms of the S2P.


If you are employed, and you earn a certain amount each year (you can find out the exact figure by calling the Pensions Forecasting Team on 0845 3000 168  - you need your National Insurance number to hand), you will automatically be earning an S2P.  

You can choose to opt out of your State Second Pension.  This involves selecting an individual pension scheme run by a private insurance company and asking HMRC to switch the S2P to this other provider.  This practice is known as contracting out of your State Second Pension. The government plan to prevent people from contracting out their S2P from 2012 onwards. 



The reason why someone would contract out of their S2P is because they are able to make a larger return through an individual insurance scheme elsewhere.  You would need to specifically choose a pension scheme that was designed for contracting out, and do not necessarily have access to every product in the market. It is very important to make sure you are fully aware of all the implications of contracting out before you take this step, since it will have consequences for your income throughout your retirement.