The State Second Pension (S2P)
May 2009
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 £95.25 a week.
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) provides more money to low earners through a simple ‘gearing’ system. Those earning from £4,940 (in 2009/10) and up to £13,900 are assumed to have paid NICs as if they were earning £12,500. The increased NICs will help to build their second state pension that much faster.
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 and you are earning less than £4,940 (2009/10), S2P allows you to accumulate an additional pension, provided you are claiming Child Benefit or Home Responsibilities Protection. 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.
You can find out more by visiting www.direct.gov.uk
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.
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.
There are also plans to reform the state second pension (S2P) system to make it a flat rate system, paying additional state pension based on the length of the recipient's working or caring life.
How to find out more
You can find out more about SERPS and S2P on the pension service website at www.pensions.gov.uk
