The State Earnings Related Pension Scheme, SERPS was introduced in 1978 by the Social Security Pension Act 1975. It is additional to the basic old age pension entitlement. SERPS does not apply to self-employed individuals as they pay a different class of National Insurance, which does not provide this type of benefit. A person who reached the state pension age before 6th April 1999 was promised a pension of 1.25% of earnings within the middle band earnings (the part of your income on which National Insurance is paid) for each year of contribution between 1978 and 1999. This produced a maximum income of 25% of the middle band earnings revalued in line with National Average Earnings (the average increase in national income).
For
those reaching state pension age in 1999/2000 or later, the promise was a revalued
pension equal to 25% of the average of the highest best 20 years income between
the lowest and the highest National Insurance payment levels. However, with
effect from April 1988 this promise was cut back. Eventually the SERPS pension
will be calculated as 20% of every contributor’s average revalued lifetime
earnings (rather than the best 20 years), a significant reduction.
Those who were contributing to SERPS prior to the 1988 changes will have part of their SERPS pension calculated based on the original 25% formula. The contributions paid from 1988 onwards will be calculated according to the tax year in which their state pension age falls:
| Percentage of benefit paid showing the reduction up to 2009/2010 for each tax year. | |||||
 |
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| 1999/2000 | 2000/2001 | 2001/2002 | 2002/2003 | 2003/2004 | 2004/2005 |
| 25.0% | 24.5% | 24.0% | 23.5% | 23.0% | 22.5% |
|
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| 2005/2006 | 2006/2007 | 2007/2008 | 2008/2009 | 2009/2010 or later | |
| 22.0% | 21.5% | 21.0% | 20.5% | 20.0% | |
Barnes IFA can arrange for you to receive a SERPS Pensions forecast as part of the SERPS review service.
Rebates Payable to a Contracted Out Pension Plan
|
Yearly Earnings Band (Tax Year 2002/2003) |
State Second Pension Accrual Rate - % of Earnings Band |
State Earnings Related Pension Accrual Rate % of Earnings Band |
| |
||
| £0 - £3,900 |
0% |
0% |
| £3,900 - £10,800 |
40% |
20% * depending on when State Pension Age is reached |
| £10,801 - £24,600 |
10% |
|
| £24,601 - £30,420 |
20% |
|
*Those reaching State pension age between 2002/2003 and 2009/2010 the SERPS percentage is between 20% and 23.5% depending on the year in which State pension age is reached. The rate after 2009/2010 will be 20% under SERPS.
The definition of Middle Band Earnings is your income between -
Lower Earnings Limit (LEL) – The minimum level of earnings needed for an employee to be entitled to contributory social security benefits. This limit increases in line with the Retail Prices Index. For tax year 2005/2006 this is set at £4,264 p.a.
Upper Earnings Limit (UEL) – The maximum level of earnings on which an employee has to pay National Insurance contributions. Employers’ National Insurance contributions are not subject to this limit. This limit increases in line with the Retail Prices Index. For tax year 2005/2006 this is set at £32,760. The additional 1% National Insurance payable above £32,760 provides no benefits whatsoever.
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