Second State Pension (S2P) Retirement Planning

In April 2016, the basic state pension will be replaced by the single-tier pension. From this date it will no longer be possible to contract out of the State Second Pension (S2P) using a final salary scheme.

Since April 2012, it has only been possible to contract out of the S2P using a final salary scheme. The ability to contract out using a money purchase or appropriate personal pension/stakeholder plan stopped on 5 April 2012.

History

The S2P was created in 1978 and if you are (or have been) in employment since then you may have built up this additional State Pension. The state second pension replaced what was known as SERPS (State Earnings Related Pension Scheme) in 2002.

Your State Second Pension entitlement could be as much as or greater than your Basic State Pension when you retire. The amount of State Second Pension you will receive depends on your earnings and your NICs record throughout your working life.

The State Second Pension, like SERPS, is earnings-related. But anyone with earnings less than a specified minimum, set by the government, will be treated as if they were earning at that minimum level and so get a boosted State Second Pension.

Self-employed people cannot build up a pension through the State Second Pension or SERPS.

Contracting out of the State Second Pension

If you are an employee earning a certain amount, you are automatically included in the State Second Pension. Prior to April 2012 it was also possible to ‘contract out’ via a money purchase style pension, which worked as follows:

You gave up your State Second Pension entitlement and built up a replacement for it in your own pension instead (for example, in a stakeholder or personal pension).
HM Revenue & Customs paid a rebate of part of your National Insurance contributions into your stakeholder or personal pension.
You continued to be contracted out of the State Second Pension, unless you decided to contract back in (as long as this was allowable by the type of plan you had).

Protected Rights

Benefits accrued from Contracting Out were known as ‘Protected Rights’ and for many years were treated differently within pension schemes than normally accrued benefits known as ‘Non-Protected Rights’. From April 2012 the government decided to treat both types of benefits equally and Protected Rights became known as ‘Former Protected Rights’ from 6 April 2012 onwards.

Many pension schemes have now amalgamated the two forms of benefit, although due to legacy IT systems still in place, some pension contracts still separate the two, but legally they are now treated the same.

Further Information

State Pension: http://www.ThePensionService.gov.uk/

You can get a forecast of how much your State Pensions will be from the Pensions Service by completing Form BR19.