The State Second Pension (S2P)
April 2010
How you could earn more in retirement
As long as you have made sufficient National Insurance contributions (NICs) during your working life, you will qualify for a basic State Pension, ensuring you earn a regular income in your retirement, currently up to £97.65 a week (2010/11).
However, you could also be entitled to an additional pension from the government, through either the State Earnings Related Pension Scheme (SERPS) or the State Second Pension (S2P), providing you with more money in your retirement years.
SERPS was introduced by the government in 1978 and was compulsory for all employees, who made NICs depending on their earnings. These contributions determined the size of the additional pension they received on retirement in addition to the basic State Pension.
What is S2P?
SERPS was replaced in 2002 by the State Second Pension (S2P), which was designed to provide more money to those in need, including low to medium earners, carers, or those with a long term illness or disability. The basic mechanism through which the additional pension builds up is the same, but with new rules. Pension funds earned through SERPS, however, will still be paid during retirement despite the change.
The State Second Pension (S2P) is based on your earnings and the number of years you have worked and paid NICs. The more you earn, the more you receive - up to a limit. The government wants to turn S2P into a flat-rate payment by 2030.
S2P also aims to help those whose working lives have been interrupted or cut short – something that SERPS didn't do.
If you are a carer looking after a child or a person with a long-term illness or disability, the S2P may allow you to accumulate an additional pension, provided you are claiming Child Benefit or Home Responsibilities Protection (HRP). This is also the case if a long-term illness or disability is preventing you from working, provided you qualify for long-term Incapacity Benefit. This additional pension will be paid on top of your basic State Pension.
For anyone reaching State Pension age on or after 6 April 2010 however, HRP has now been replaced by a new system of weekly contribution credits. Parents and careres will be able to build up qualifying years for the basic State Pension and additional State Pension by earning credits.
For more information about contributing credits, please see The basics - The State Pension.
Or you can visit the Directgov website.
Contracting out of SERPS and S2P
It has always been possible to ‘contract out’ of SERPS and the same is now true of S2P. You will receive rebates on your NICs to invest in other pension plans, such as an occupational pension scheme, a personal pension or a stakeholder pension. You can ‘contract out’ at any time in your working life if you feel that another scheme would suit you better, and you can rejoin at any point in the future, although you will have to leave the other scheme to do this.
However, choosing whether or not to ‘contract out’ can be a very difficult decision, as it depends on working out which option is likely to create the most amount of money for you in your retirement. So it is essential to seek professional advice.
After the 2011/2012 tax year, anyone in defined contribution schemes will no longer be able to 'contract out' of the S2P. People who have been 'contracted out' will start to build up entitlement to S2P from 6 April 2012 onwards, making private pension systems much easier to understand. This will also improve annuity options for these types of pension savings.
There are no hard and fast rules concerning whether contracting out is right for you, and unknown factors like future changes to government pensions policy and your specific circumstances are likely to have an impact.
How to find out more
You can find out more about SERPS and S2P at the Directgov website.
