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What is SERPS and What Was 'Contracting Out' ?

By: J.A.J Aaronson - Updated: 27 May 2017 | comments*Discuss
 
Serps State Earnings Related Pension

SERPS is an abbreviated name for the State Earnings Related Pension Scheme, also known as the additional state pension. It was a pension scheme operated by the government, which ran until 5 April 2002. SERPS has now been replaced by the Second State Pension but, as a result of entitlement and inheritance rules, it is important to understand the nature of the scheme.

Anyone who made Class 1 National Insurance Contributions (NICs) at any point between 1978 and 2002 has a SERPS entitlement. The idea of SERPS was to increase the amount being paid to retirees, in addition to the basic state pension. It was originally thought that the pension paid would be equivalent to 25 per cent of the pension holder’s total earnings, but this amount was later reduced to 20 per cent.

How Much am I Entitled to?

The calculation that must be completed in order to work out the size of an individual’s SERPS entitlement is fairly complicated. The steps are as follows:

  • 1. The individual’s ‘surplus earnings’ are calculated, by working out the difference between the lower earnings limit and upper earnings limit for every tax year for which the individual was a SERPS member.
  • 2. This surplus earnings figure continues to rise until the individual reaches state retirement age.
  • 3. Total earnings for each tax year between 1978 and 1988 are divided by 4. Total earnings for each tax year between 1988 and 2002 are divided by 5. These figures are added together.
  • 4. This amount is then divided by the number of tax years that passed between 1978/79 and the year in which the individual reached or will reach state retirement age.

What was 'Contracting Out'?

Many people chose to ‘contract out’ of SERPS. This meant that they made contributions to a private pension scheme, and reduced or eliminated their entitlement to SERPS. This was popular amongst employers as it resulted in their paying less in National Insurance Contributions. This option was initially only available to those who contributed to final salary pension schemes, but the opportunity was also opened up to money purchase schemes in 1998.

If you contracted out during or after April 1997, you will have no SERPS entitlement relating to earnings after that point. If you contracted out before that, your entitlement will be reduced in line with the so-called ‘contracted-out deduction’.

If you have a SERPS entitlement you will receive it from the point at which you reach state pension age. An entitlement may also be paid to the surviving spouse or civil partner of a deceased SERPS member, but the rules regarding the amount that will be received by this individual are very complicated. In essence, since October 6th 2002 the money paid to a surviving spouse or civil partner will depend upon the time at which the entitled individual would have reached state pension age. You should contact the Pension Service directly if you need personalised advice on this matter.

SERPS has now been replaced by the State Second Pension, which aims to provide a better pension for those on low and medium incomes. Other pension types are explained in more detail elsewhere in this section.

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Can relate to roboelv comments regarding SERPS.I to contacted out in the late 80's with allied Dunbar (think I spelt it right was a long time ago).remember the rep giving me a lift home from work and because it was 2 bus rides away was grateful. Looking back it must have been worth his while on commission alone...I would advise anyone who contacted out to contact Royal London with your NI:Num and D.O.B and get a statement as this company seems to be the one that deals with the majority of one's taken out in the late 80's. They were prompt and very good..got my statement thru and was pleased with results. Hope this info helps
Spencerbax41 - 27-May-17 @ 12:05 PM
A salesman from the Prudential came to my home and advised me to contract out of Serps. This was in 1982 when I was 18.I still don't have a clue what it is all about. Can anyone help.
Andy - 4-May-17 @ 6:33 PM
I contracted out of serps in late 80s,i didn't really know what it was about. The company folded and moved it to anothe.r When I reached 50 i took the 25%taxfree it wasn't a lot but good to pay off debts. I wasnt told i could drawdown the lot.now im disabled and not expecting to live long i wondered if they would allow the drawdown as the monthly annuity i get is taxed at 25% and puny (i could get more with a paper round!Can i withdraw it all out?
Yaz - 4-May-17 @ 12:38 PM
I remember opting out in the late 80s or early 90s ,a salesman came and spoke to all employees where i worked,he was showing us pictures of expensive cars and hoildays saying we could have all this when we retire,loads of us signed up for this being young and daft we all believed him could this be a case of miss selling.
John - 3-May-17 @ 4:33 PM
I contracted out of serps on advice in the 80,s , worry it might affect my deferred state pension
zomba - 10-Apr-17 @ 4:21 PM
I also contacted out of SERPS in the 80's in my 20's didn't understand it was encouraged by my employer. I'm know 49& have never paid a penny in to it. Didn't understand then still don't. I think k a lot of people my age r in the same boat. Who do I seek for advise & what does it mean when I get to retirement age.?
Sam - 28-Mar-17 @ 9:54 AM
How do you know if you've paid into to serps and can you cash them in
Jakobsnan - 14-Mar-17 @ 5:23 PM
I did this about 1990 when i was in my 20's and working for kps. Some rep spoke to most of the employees and advised us to do this. I think it might have something to do with the statements i was getting twice a yr since then but dont think ive had 1 for a while now. Never understood it all just some paperwork with loads of figures on it etc so not sure if I've lost out or what?
Simmo - 7-Mar-17 @ 10:17 AM
I worked for the council for 30yrs i was in serps but didnt realise they opted out of serps i also was young and didnt sign anything to come out of serps i just trusted my employee with what was best for myself i am now retired and have been penalised of £69 pds of my pension a month of no fault of my own was my employee allowed to do this?
Acemace - 2-Mar-17 @ 10:00 PM
I don't know if it will help anyone but I opted out of SERPS in the 1980s with the Co-Op (CIS) as I was suggested by an advisor to do so.I didn't really understand it but I had not long entered my 20s and any concerns about pensions were a long way off.I then moved on and ever since have not given it any thought until we had a pension presentation at work about the new Salary Sacrifice opt out scheme.I was then advised that I need to try and trace this policy.Given it was almost 30 years ago, it seemed a daunting task but a quick Google revealed CIS policies was taken over by the Royal London Group.SoI phoned them and within a few minutes they found my policy and all details - so I should get a statement, my first for 28 years, in the next 10 days.I'm still not exactly sure what it means but the information is out there.:)
Roboelv - 16-Feb-17 @ 2:59 PM
I opted out of serps in the 80'same young then and didn't really understand does it mean I won't get a state pension when I reach retirement age ?
JennyL - 14-Feb-17 @ 1:08 PM
Opted out in the ,90s but wasn't really told anything about it except that part of my NI payments would be put into my pension. I cashed that pension in when I turned 50 which you could do before 2010 , but wasn't told this would affect mypayments being made out of my NI. I thought this was paid into a different fund separate from my private pension. Will this affect my state pension which I should be getting next year 2018 and is their anything I can do?
Mick - 8-Feb-17 @ 8:12 PM
Marge67 - Your Question:
I opted out of serps around late 80s with albany life.i was told this was best as when I retire there would be no state pension so I wouldn't get any money,I was told this was the best thing for me,I was young at the time so never really understood. So signed up,I'm now approaching 50 and have moved house so I have no information from the company or if they still exist or if I get a state pension

Our Response:
In this case you may wish to contact the Pension Advisory Service directly to see what options you have to trace your pension, please see link here. You may well still have some pension provision that you’re not aware of, as the payments would have come directly out of your National Insurance contributions.
MoneyExpertise - 1-Feb-17 @ 10:02 AM
I opted out of serps around late 80s with albany life.i was told this was best as when I retire there would be no state pension so I wouldn't get any money,I was told this was the best thing for me,I was young at the time so never really understood. So signed up,I'm now approaching 50 and have moved house so I have no information from the company or if they still exist or if I get a state pension
Marge67 - 31-Jan-17 @ 3:54 AM
I was advised to contract out of SERPS, then let my payments drop when I went and worked abroad. I get regular statements from the plan I set up, but I don't pay into it. I have am paying into NEST with an additional £20 a month but want to know how the contracting out will affect my state pension and what I should do now.
lw11 - 4-Jan-17 @ 4:09 PM
I contracted out of S.E.R.P.S. in the 80"s & 90"s and later was advised to come out of it.As I know who my Pension providers are will they automatically get in touch with me regarding when and how much they will pay me, or will I have to contact them.Bearing in mind I have received my O.A.P. details from the D.W.P. and shows how much each week I should get from my "Second Pension".Please can you advise? Many Thanks., in anticipation of your help.
Nobby - 16-Dec-16 @ 11:51 AM
I was advised to contract out of serps in the early 80's, I was young, and didn't have a clue, I am now hitting my 50's.What's the best way forward.
Gavin101 - 10-Dec-16 @ 1:10 PM
Kaz23 - Your Question:
I contracted out on the advise of a financial advisor and as I trusted him and didn't know what it was I assumed at the time it was what I was meant to do. He said I could only do it until I was 40. Then it wouldn't be any good. I have never heard anything about it since. But as I am now 54 I need some help. Please could you advise me on how to find what pensions I have (or not) and am I still entitled to full state pension as I opted out. The financial advisor clearly misinformed me and didn't give me the whole picture, which I am now realising. Thank you

Our Response:
Please see Pension Advisory Service link here for further information.
MoneyExpertise - 7-Nov-16 @ 2:53 PM
I contracted out on the advise of a financial advisor and as I trusted him and didn't know what it was I assumed at the time it was what I was meant to do.He said i could only do it until I was 40.Then it wouldn't be any good. I have never heard anything about it since. But as I am now 54 i need some help. Please could you advise me on how to find what pensions I have (or not) and am I still entitled to full state pension as I opted out.The financial advisor clearly misinformed me and didn't give me the whole picture,which I am now realising.Thank you
Kaz23 - 5-Nov-16 @ 5:50 PM
Opted out of serps in 1987 had tegular statments up to 2002 at which point the fund had £18000.00 In it will have to fight to get this back ?
Twandy - 2-Nov-16 @ 11:25 PM
Hope you can help.when I was younger my mums insurance bloke persuaded me to go into a scheme where I contract out of serps and they end up collecting it or something and it builds up for my pension.I have never paid into it myself but basically was I mid sold a bad idea and where do i go to get advice on what to do if i was.thank you
Mrdeano - 29-Oct-16 @ 9:28 AM
Icontracted out of serps in the 80s iam 50 years old do i still get a old age pension
floyd8002 - 14-Sep-16 @ 11:52 AM
Iv been paying serps into a private pension but on a low income i avnt been paying into it my self only serps .im 55 in jan 17 can i draw on it wud lve a cash lump sum i get a stateme.t evey jan and its about 24k .im i intitled to anything
jez - 20-Aug-16 @ 9:37 AM
I joined the M&S pension fund in 1989 which contracted out. Is there anything I've missed out on by being in this scheme?
Ally - 3-Aug-16 @ 8:13 PM
Barney - Your Question:
I opted out of serps in 1987, I didn't have a clue what it was, I was advised to do so via a financial advisor because the government would pay extra into my pension pot.Ive never heard anything since until today, I've received a letter from Scottish widows saying I can cash this in, as I'm now 57, as I'm now unemployed and really desperately need the money, if I do, what will this do to my state pension when I officially retire, I wrote to the pension advisory department who said I currently have 31 years paid? Please, please advise

Our Response:
In this case you should contact the Pension Advisory Service directly for advice please see link here .
MoneyExpertise - 2-Aug-16 @ 12:28 PM
I opted out of serps in 1987, I didn't have a clue what it was, I was advised to do so via a financial advisor because the government would pay extra into my pension pot. Ive never heard anything since until today, I've received a letter from Scottish widows saying I can cash this in, as I'm now 57, as I'm now unemployed and really desperately need the money, ifI do, what will this do to my state pension when I officially retire, I wrote to the pension advisory department who said I currently have 31 years paid? Please, please advise
Barney - 1-Aug-16 @ 8:12 PM
I was in surps don't no if I opted out but have got a statement from another. So think I might have. Also I have changed address how would I get in touch to give them new address. So when the time comes as I'm only 48 I will receive what I'm owed. Thank you Linda.
Chappy - 27-Jul-16 @ 8:24 PM
Jelly - Your Question:
I opted out 90's. fell on tough times froze pension. Never restarted it. totally ignorant bout things like this.

Our Response:
Please see the Pensions Advisory Service link here which should help you further.
MoneyExpertise - 25-Jul-16 @ 10:07 AM
I opted out 90's.. fell on tough times froze pension. Never restarted it.. totally ignorant bout things like this.
Jelly - 24-Jul-16 @ 12:51 AM
My hubby passed away last Aug he contracted out from 1987 holds a pension with protected rights death benefit us £17k do I get all of it in a tax free lump sumplease?
Linda - 13-Jul-16 @ 11:31 PM
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