What Is SERPS and What Was 'Contracting Out'?

What Was SERPS?

SERPS stood for the State Earnings Related Pension Scheme. It was a government pension scheme that ran from April 1978 until April 2002. You may also see it referred to as the additional state pension.

The scheme was designed to top up the basic state pension for employees. The amount you built up depended on your earnings and how much you paid in National Insurance. SERPS initially aimed to pay up to 25 per cent of a member's relevant earnings, though reforms later reduced this to 20 per cent.

If you paid Class 1 National Insurance contributions at any point between 1978 and 2002, you will have built up some SERPS entitlement. This forms part of your state pension today, even though the scheme itself closed more than twenty years ago.

How SERPS Entitlement Is Calculated

Working out exactly how much SERPS pension you earned is not straightforward. The calculation involves looking at your earnings for each tax year you were a member of the scheme, with revaluation rates that changed over different periods.

For each year, your surplus earnings are worked out. This means comparing your actual earnings against the lower and upper earnings limits that applied at the time. These surplus earnings are then adjusted using a revaluation factor to account for inflation over time.

Once all relevant years have been calculated and revalued, the figures are added together and a percentage applied. The percentage depends on when you reached state pension age and which rules applied at that time.

For most people, the easiest way to find out what you have built up is to request a state pension forecast from the government. You can do this online through GOV.UK, though you should check for the most current service as government portals change over time.

Your situation may be slightly different. ask a question below ↓ and our editorial team will reply with our advice.

What Was Contracting Out?

During the years SERPS ran, employees and employers had the option to contract out of the scheme. This meant giving up future SERPS entitlement in exchange for lower National Insurance contributions, with a rebate paid into a private or workplace pension instead. Both elements typically applied together.

Contracting out was common. Many employers with occupational pension schemes chose to contract out their workforce. Some individuals also contracted out through personal pensions.

Whether contracting out worked in your favour depends on several factors. These include how well your private pension performed, how long you were contracted out, and the economic conditions during that period. For some people it was beneficial. For others, particularly those whose private pensions performed poorly, it may have left them worse off.

Why SERPS Still Matters

SERPS was replaced by the State Second Pension in 2002. When the new State Pension was introduced in April 2016, it created a unified structure for those reaching pension age from that date onwards. Any SERPS entitlement you built up was factored into your starting amount under this new system.

If you reached state pension age before 6 April 2016, your SERPS entitlement still counts directly towards your state pension under the old rules. Those who reached pension age after that date may find their starting amount reflects periods of contracting out through deductions.

SERPS entitlement can also be inherited by a surviving spouse or civil partner in certain circumstances, though inheritance rules were significantly limited following the introduction of the new State Pension.

If you have questions about your own entitlement or how contracting out may have affected your pension, the Pension Service or MoneyHelper can provide guidance. You can also check your National Insurance record and state pension forecast at GOV.UK.