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Guide to what the state pays in retirement

Top-up pensions

In the past 30 years or so, the government has also offered a series of additional state top-up payments, some linked to income. This means that some people may get more than simply the basic state pension or even Pension Credit.

One of the most important is the State Earnings Retirement Pension Scheme (Serps), recently replaced by the State Second Pension, also known as “S2P”.

Serps is linked to your income and National Insurance Contributions paid to those in work between April 1978 and April 2002.

Here are the basic rules:

• Serps pays a maximum percentage of average earnings between a lower and an upper earnings limit, broadly in line with the minimum and maximum levels where full NI contributions are levied. This is known as the earnings band.

• For those retiring after 2010, the maximum Serps pension payable will be 20 per cent per cent of average earnings between the upper and lower limits. For those retiring earlier, it is based on a sliding scale from 20 per cent to a maximum of 21.5 per cent.

• Serps is calculated on average lifetime “band” earnings, not a final salary. Band earnings are the sum earned (up to the upper earnings limit, above), minus the lower limit.

• It is also assessed on exactly the same number of contribution years as the basic state pension (44 for men and, eventually, women). So the maximum payable is 24/44ths of your average band earnings in this period.

• To work out your likely Serps pension, you add up your “band earnings” in each year, divide by the number of years to which you are entitled to this pension (a maximum of 24) as a proportion of 44, and calculate it based on the percentage tables above.

• For example, if you were entitled to Serps and your lifetime band earnings between 1978 and 2002 (the maxim number of qualifying years) were £400 a week, and you retired after 2010 you might receive approximately £43 a week. There are additional formulas that can affect the final payout.

One point to note is that the self-employed, those who have part of their National Insurance Contributions paid into a personal pension, or whose employer opted out of Serps, receive a reduced Serps pension or none at all.

State Second Pension (S2P)

Since April 2002, Serps has been replaced by a new State Second Pension, or S2P. Those who retire in the future may receive an additional pension under both Serps and S2P.

Like Serps it is an earnings-related scheme. However, unlike Serps, the main focus of S2P is on the lower-paid. It is structured according to certain earnings “bandwidths”, to reward those on lowest salary levels.

Finally, it is worth noting that many people’s Serps and/or S2P payments may still mean that, when added to their basic state pension, they will be entitled to Pensions Credit as well.

More pages

Page 1: Introduction
Page 2: Where does the Savings Credit come in?
Page 3: Top-up pensions

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