If you are in your sixties, just coming up to official retirement perhaps, and you were just beginning work in the late 1970’s, then it is likely you will remember SERPS (a financial system designed by the government of the day to complement the State Pension) to a degree.
But for young workers in the late seventies, it also belonged to the complex area of pensions and somewhat uninteresting world of retirement. So, memories may be a little misty or vague.
Did you contribute to it? Do you remember the possible benefits? You may have been given the option to opt out – so what happened to the money you would have contributed? Is there a chance you could be looking forward to additional payments on top of the regular State Pension? Most importantly why did SERPS disappear?
SERPS stands for State Earnings Related Pension Scheme and it was a pension system you could contribute to via your occupation in the period between 1978 and 2002. It was not mandatory like contributing to the basic State Pension – individuals could decide whether they wished to be part of it or not. The word SERPS has crept surreptitiously into everyday conversations over the years, but it is amazing how few people now in the 21st century really understand what it is. Because the system is now redundant and it all happened some time ago, many people have forgotten exactly how it may have affected finances in their early career. So, let’s take a closer look.
Our pensions have changed many times over the last few decades and the original purpose of SERPS was to provide a pension linked to employment over and above the State Pension.
It was formed by an additional contribution to the State Pension on top of National Insurance (NI) contributions. For individuals who opted into the scheme, the State Pension had two levels:
Between 1978 and 2002 if you paid full class NI contributions you were paying into SERPS. When you opted out, your pension NI contributions reduced and so did your State Pension pay-out. However, you could transfer money originally spent on NI contributions to another private pension, which is what many people tended to do.
From 1988, individuals were allowed to place their money in a money purchase pension scheme instead of NI contributions. Those individuals opting out had the choice of seeing their money invested in a private pension or in the company final salary scheme.
The fact is, employers with a final salary scheme tended to opt out of SERPS. In most cases they could evidence that they could more or less match what SERPS was offering.
Many people feel confused as to whether they opted out or not. If you are unsure, the best thing you can do to check how your money was reinvested is to contact the HMRC. It is recommended to send a letter with all your basic details (including National Insurance number) to:
National Insurance Contributions & Employers Office
HM Revenue and Customs
There is no doubt the State Pension itself is going through a period of flux. The triple lock system was recently suspended because of the pandemic. It is therefore a good idea to double check what your state pension is likely to be. If you need to top it up, you can always add voluntary contributions. You can check your State Pension here.
If you opted out of SERPS, then money which would have been paid into the National Insurance scheme would have been invested in a final salary scheme or a private pension scheme. This was called a Protected Rights Pension. As this scheme was abolished in 2012 it should now be available for Pension Release from the age of 55.
If you are entitled to SERPS you will receive it at State Pension age. The amount you receive will be dependent upon what you earned in your working life, the number of years you contributed NI and whether you contracted out or not.
SERPS was struggling to meet the benefits it offered even in the 1980’s. When first designed, it was supposed to pay-out 25% of your salary. By the late 1980’s this was reduced to 20%.
In the late 1990’s it became apparent that affording the benefits of SERPS was going to be a tall order for the government. In response, the government tried to encourage individuals to opt out for alternative schemes with new incentives. When those incentives were questioned or benefits seemed less than SERPS, the message suddenly changed to “opt in”! It all became a little chaotic and many felt they had been mis-sold those pensions which were meant to take the place of SERPS.
There was also a need to create a State Pension for lower earners. So, in 2002, SERPS was scrapped, and the new State Second Pension (S2P or Additional State Pension) took its place.
Looking back on SERPS now, it appears a bit of an outdated idea. Now individuals have much more flexibility in how much they put into their pensions and where they invest it, and the performance of each pension all seems a lot more transparent.
The State Pension remains the fundamental savings pot for retirement. On top of that, individuals can invest in whichever fund they prefer. Private companies provide updates as to how funds are thriving, but pension pot owners must be motivated to keep a close eye on how their investment is performing. It’s important to remember that past performance is not a reliable indicator of future results. It can all seem a little complex and bewildering so regulated financial advisers can help people navigate financial conundrums.
We are authorised and regulated by the Financial Conduct authority. This means we can help you to make the best possible decisions when it comes to your pension.