SERPS, Or A Tale Of Two State Pensions

SERPS, Or A Tale Of Two State Pensions

Last week's revelations about the gender pay divide at the BBC managed to bury the bad news of another rise in the state pension age. Recently appointed Secretary of State for Work and Pensions, David Gauke announced that from 2037 the UK state pension would rise from 67 to 68 for everyone born between April 1970 and April 1978.

As someone born 17 months before the qualifying period, I can at least be grateful I dodged that bullet. Rather ironic too that 1970 is also the dividing line between those who can claim their private pension at 55 and those who must wait until they're 57.

Of course, shifting the state retirement age back from 67 to 68 has not only deprived many workers currently in their 40s of a year's pension - almost £8,300 in today's money, they'll have to fork out an extra year of National Insurance contributions too.

Workers in their 40s are caught in the middle of recent pension reforms - both state and workplace. And one little-reported issue captures their plight only too well. I'm talking about last year's axing of the state second pension which will result in many receiving a considerable lower income on retirement.

The reform to state pensions was implemented in April 2016 and heralded as a fairer, one size fits all, 'flat-rate' state pension. On the face of it, swapping the old basic state pension (currently £122.30 per week) to the new 'flat-rate' £159.55, seems like an act of generosity, an increase of more than 30 per cent. In reality, it hides the additional state second pension amount which millions of UK workers have now lost.

What was the state second pension?

The state second pension (S2P), formerly known as SERPS (State Earnings Related Pension Scheme), was introduced in the late-1970s as a means of topping up the basic state pension for workers who paid regular National Insurance (NI) contributions. Under the Thatcher Administration's welfare state reforms, workers were given the opportunity to opt out (or contract out) of SERPS from 1988 onwards and invest the money into private pension schemes. Following pensions mis-selling scandals of the early '90s, many people were advised not to opt out and instead put their faith in the state scheme. The ability to opt out ceased in 2012, the same year the plans for the massive state pension shake-up were announced.

With the anticipated new scheme there was much concern that those who'd paid SERPS/S2P contributions would lose out. The Coalition government's Pension Minister, Steve Webb reassured listeners to Radio 4's Money Box on 9 June 2012 that: 'If you haven't yet retired, our starting point will be the rights you have already built up.' Others wondered if workers who had opted out of SERPS over the years would get the full flat-rate pension or receive a lower amount unless they paid their NI contributions back in.

Winners and losers

It wasn't long after the new system launched in April 2016 that my peer group started using the Department for Work and Pensions pension forecast tool to check how many years of contributions we'd paid in and what proportion of the state pension we'd already built up.

Two broad groups emerged.

Those who had never opted out of S2P/SERPS had - or were a year or two short of - a full set of NI payments entitling them to the maximum state pension on retirement at 67. None of us was predicted to receive a greater amount that the maximum flat-rate pension. I take it these pension payments could only be for workers aged 50 or above who'd had more years accumulating their NI contributions.

For those who had opted out of SERPS/S2P, as might be expected, they'd accrued much less towards their state pensions. Nevertheless, they were forecast to have reached a full set of payments if they continued to pay their NI for a further 9-11 years, entitling them to the full new state pension too.

In short, both these groups of workers will carry on paying NI contributions for the best part of 20 years. Both will receive the same full flat-rate state pension on retirement at 67. Yet one group will end up having paid significantly more into the state pension pot to arrive at the same outcome.

The opt-outers tended to be workers on higher incomes with stable jobs and company pensions who could afford to be more 'financially daring' and take a few risks with the SERPS/S2P money. Members of this group win twice, as in effect they will be subsidised by workers who didn't opt out or younger workers who never had the chance pay into SERPS/S2P in the first place. When it comes to the UK state pension, many workers who opted out of SERPS will get the chance to have their cake and eat it.

The losers are clearly those who put their trust in the full state pension provision available at the time. The winners? Those who opted out whose investments took off. And the biggest winners, the UK exchequer whose state second pension bill will be slashed in the decades to come.

Finally, spare a thought for those 40-something workers whose state pension age was put back last week. Too young to have built up enough S2P/SERPS NI contributions for a state pension higher than the new £155.59 per week, yet too old to benefit from consistently paying into the new automatic enrolment workplace pensions.

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