State pension explained State second pension and Serps
Working out how to calculate the total state pension you'll receive is complicated. Not only do you receive basic state pension, you can also top this up through an additional state pension that you've accrued in the past.
It's been called a few things over the years. If you were paying into the additional state pension before 2002, it was called State Earnings-Related Pension Scheme (Serps). If you were paying in after 2002, it will be called State Second Pension (S2P).
The additional state pension disappeared in April 2016, with the new flat-rate pension taking the place of the basic state pension and the additional state pension, but you'll still be entitled to some of it that you've built up.
If you qualified for the state pension before 6 April 2016, you might get some additional pension on top of your basic pension (£119.30 in 2016/17). After 6 April 2016, you might get more than the full level of new state pension (£155.65) if you've built up a certain amount of additional state pension.
How much state second pension do I get?
The amount of state second pension you get is based on your earnings over the years that you have made National Insurance contributions.
The maximum state second pension you could get in 2015/16 was around £160 a week. This was in addition to the maximum basic state pension of £115.95 in 2015/16, which could potentially take your total state pension to around £276 a week.
Go further: National Insurance and state pension - get to grips with how the two are linked
Who qualifies for state second pension?
If you were paying in to the additional state pension before 2002 under Serps, only people that were working qualified for it.
However, under State Second Pension, which was designed to help people who are unable to work or on low incomes, the following people qualified:
- employees earning at least £112 a week (in 2015/16)
- people caring for one or more child under age 12 for whom they are claiming child benefit
- people claiming carer's allowance
- people claiming certain disability-related benefits
People who weren't covered included the self-employed and those who have contracted out of State Second Pension.
Contracting out of the state second pension
To lift the burden of paying additional state pension to every worker, the government previously allowed pension savers to 'contract out' of the state second pension. The deal was quite simple - you paid less National Insurance and therefore didn't get the additional state pension, and the money you saved in National Insurance was put into your workplace or private pension.
How contracting out worked depended on what kind of pension scheme you were saving into.
1. Contracting out on in a defined benefit, or final salary, pension scheme
If you were saving into a defined benefit, sometimes known as a final salary scheme, your employer was required to provide you with a 'guaranteed minimum pension' that's as good as the state second pension you were giving up.
This type of contracted-out scheme will pay a set amount when you retire, much like that you receive from your defined benefit pension scheme.
Go further: Final salary pensions explained - learn more about defined benefit schemes
2. Contracting out in defined contribution, or money purchase, pension schemes
Until April 2012, you could contract out of a defined contribution pension scheme in the workplace. This has now been abolished.
Both you employer and employee continued paying National Insurance contributions at the normal rates. Part of these contributions were then rebated back into your pension scheme.
The amount you get when you retire depends on the size of these rebates, along with how well the fund grows - there are no guarantees this will be as good as the state second pension. This was one of the main reasons why contracting out of defined contribution schemes was abolished in 2012.
Go further: Defined contribution schemes - how they work and how your money grows
State pension reforms and S2P
Both the state second pension and contracting out disappeared with the new single-tier state pension. So if you have been contracted out (on a DB basis), your National Insurance contributions have increased, as have those of your employer.
Any contracted out pension you have built up until 2016 is protected. But for those in a defined benefit, or final salary scheme, your new state pension will be reduced to balance out any extra pension you receive from being contracted out.
- My retirement: what do I need to know? - get set for your retirement
- What is a pension? - learn about pension saving basics
- The Which? Money Helpline - call our experts for help with your pensions
Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.