Home > Pensions & Retirement > What is SERPS and What Was 'Contracting Out' ?

What is SERPS and What Was 'Contracting Out' ?

By: J.A.J Aaronson - Updated: 16 Feb 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 SERPS has now been replaced by the Second State Pension but, as a result of entitlement and inheritance rules, it is important to understand the nature of the scheme.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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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
Does any compensation owed for whatever reason have to be locked up til turning 55 years of age
Bags - 30-Jun-16 @ 7:03 PM
I remember opting out of seeps on the advice of a financial advisor in the 1980's but never really knew what it was. I understand that I may now not be entitled to a state pension in later life, due to this. I was never advised of this fact- how do I go about trying to sort this out? Please advise!!!
Jane - 10-Jun-16 @ 6:45 AM
I joined sun life Canada in the 80s . And was paying in serps for about ten years contributions stopped and it as been frozen ever since . I get regular statements every year from sun life .it stands now at 18000 pounds . Can I transfer that pot into my new working pension plan
Croc - 9-Jun-16 @ 5:30 PM
I took out a with profits endowments contributory pension with Sun Alliance in 1988 and was advised by them to contract out of SERPS with the NIC's paid into a seperate Protected Pension Plan. Nothing was made of it at the time but the small print of the policy contained a Guaranteed Annuity Rate (GAR) of 10.93%. In 2001 Sun Alliance wrote to me urging me to contract back into the state scheme which I did. I now find that this plan, after those 11 years of contributions, will produce some 3 and a quarter times more annuity payments per week, as I turn 65 in 2016, than the contracted out reduction to my state pension due to the GAR written into the Sun Alliance scheme. Was I poorly advised by Sun Alliance or did the change to S2P from SERPSin 2002 alter matters?
Flashgordon - 12-Apr-16 @ 2:59 PM
I took a pension out with confederation life back in the 90's I was advised to opt-out of SERPS.. Then a couple of years later I was advised to opt-back in.I receive each year annual statement for my opt-out pension and my normal personal pension, both of which are currently frozen. I was 19 at the time of taking the schemes out.Do I need to investigate further as over the years my pensions have swapped hands between different pension companies and it's currently with sun life of Canada. Can you advise what I should do? Thanks
Ellydisley - 20-Mar-16 @ 12:49 PM
Hi I was in the army from 1972 to 1978 and recall having the option to opt out of SERPS being promoted. I seem to recall I did opt out, but can find no record of this or what potential benefits I might have accrued. can you help? Many thanks Peter
Peter - 6-Mar-16 @ 9:38 AM
Terri - Your Question:
Hi there, I worked for prudential property services (Pru's Estate Agency arm) in the late 1980's and the financial advice insisted we all contracted out. I think he got a bonus for each one of us he signed up. I'll be 55 later this month. Will this affect the pension I get when I retire at 67? I had no choice and all staff at our branch were systematically signed up and contracted out. I don't have any of the original paperwork as it was held on file in the office.

Our Response:
You would have to approach the company directly regarding this.
MoneyExpertise - 2-Mar-16 @ 2:30 PM
Hi there, I worked for prudential property services (Pru's Estate Agency arm) in the late 1980's and the financial advice insisted we all contracted out. I think he got a bonus for each one of us he signed up. I'll be 55 later this month. Will this affect the pension I get when I retire at 67? I had no choice and all staff at our branch were systematically signed up and contracted out. I don't have any of the original paperwork as it was held on file in the office.
Terri - 2-Mar-16 @ 7:04 AM
How can I claim against mis-sold SERPS I contracted out in 1990. I believe I am entitled to £9000 in compensation.
Tam - 13-Dec-15 @ 10:19 AM
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