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: 21 Nov 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 SERPS has now been replaced by the Second State Pension but, as a result of entitlement and inheritance rules, it is important to understand the nature of the scheme.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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Contracted out 1984 with allied crowbar private pension. Ceased 2012. Fund is 85k and still full state pension to look forward to if working 12 more years ! Happy days ??
Solo - 21-Nov-17 @ 6:36 AM
I got £22000 from being contracted out . Call National Insurance Dept to find out if you ever contracted out.Follow these steps 0300 200 3507. DO NOT RESPOND TO REQUEST WHICH DEPT ETC...just hold on When OPTIONS are given, choose OPTION 5 You will need your national insurance number.You need to ask 2 questions 1. Dates contracted out 2. Names of scheme If you have ever contracted out, they will be able to provide that information.Then you can contact the Financial Company. If you are 55 or over, you can take your fund BUT it is taxable and you may need to move your fund. They will send you booklets explaining.My fund was with Abbey Life.I wanted to withdraw part of the fund ( so didn’t pay tax) but they didn’t do partial withdrawals so I moved it to Legal and General.Took a little while ro read up on it all, but was worth it.A lovely unexpected surprise for me...of course, you can leave all or part of the fund invested. Good luck
Sybs1 - 20-Nov-17 @ 12:13 PM
Hi I contracted out of serps when I was 16 back in 1988 I have no idea why or what it meant and how it will affect me when I'm pension age??
G - 2-Nov-17 @ 1:44 PM
I was advised to opt out of SERPS in the 80’s. Too young to understand what this meant and as far as I know I never paid anything in. I’m 55 in February, am I entitled to anything?
Smartalec - 1-Nov-17 @ 3:16 PM
I have recently found out I was contracted out of SERPS,I don't know when this happened and I cannot recall any agreements in regard to SERPS,I found out whilst looking into Forces Pension Scheme , they told me I was not entitled to a pension due to the age I joined up,16 only entitled to FAS five years over the age of 18,Any way going back to the subject of being contracted out of SERPS ,where do I stand ?will I have a pension? Am I due any money and can I get help to claim back compensation if that's the course I need to take ? I don't understand how this works now age 57 so I would never have understood the ins and outs of the pension world at age 16,
Raty - 16-Oct-17 @ 12:11 PM
My best friend worked for Manulife in mid 80's, he said I must contact out of serps, I did, Canada Life took over and bought out Manulife in mid 90's, every year I get a statement, its worth £48,000+ now as was always invested in property and a managaed fund by them....at 55 (next year) I can take the lot minus tax of course..............we all still get our state pension at 65 as normal, nothing changes here.................of Contracting out my a good way to go....
dazza - 11-Oct-17 @ 6:44 PM
Does this apply to people serving in H.M. Forces?
Bernie - 10-Oct-17 @ 11:46 AM
@poppydog.I also contracted out of serps in the same year and age.The best thing to do is find out where your contributions are and get a statement. I was lucky enough to find mine and pleasantly surprised with results. If in doubt contact royal london there advisers are really good and took over alot of smaller companies around at that time.it's only a phone call and if they don't have your policy I'm sure that they will put you onto someone that does.happy hunting.
Spocksbeard45 - 7-Oct-17 @ 2:10 PM
I contracted out of serps in 1987, some people came to my works and advised me that this was the best thing to do, I was only 17 and didn’t really know what I was signing, where do I stand
Poppydog - 5-Oct-17 @ 11:34 AM
How do I find out if I am entitled to serps
H - 1-Oct-17 @ 1:20 PM
Brittania is now called phoenix life there number is 0345 305 5552 give them a call.
Davo - 6-Sep-17 @ 6:56 PM
Husband was signed up for serps in 80s by insurance bloke never paid any contributions to it nor did his employer been informed that he was contracted out in 2002and when he was contracted out some money that I presume the government paid to this was invested for him at the moment we get tax credits and was wondering do I need to contact tax credit about this even though he has never paid anything in to it nor his employer really worried about all this so any help would be appreciated
harras - 14-Jul-17 @ 3:17 AM
I have just been sent a pension forecast, it says I will be deducted £25 per week because I have a private pension,why is this happening?
Cropmaster - 30-Jun-17 @ 8:50 AM
Was 18 when I opted out of serps,seen an advert where they try and get my money back.Any advice you could give me?
Aldo - 25-Jun-17 @ 7:32 PM
I opted out in the 80's. What does this mean?
Moji - 16-Jun-17 @ 1:57 AM
I opted out of serps in the 80s didn'treally understand it tho how can I find out
Bettsy67 - 13-Jun-17 @ 6:07 PM
How do I find out if I'm entitled to anything
Gazza - 2-Jun-17 @ 6:26 PM
I opted out of serps ithe late 1980s think the company was called Britrania ? How do i find out?
kirsty - 1-Jun-17 @ 4:39 PM
I opted out of serps in the late 80s cant remember the company think it may have been Brittania?? I didn't really understand what this means how do i find out?
kirsty - 1-Jun-17 @ 4:37 PM
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
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