Even State Second Pension benefits are getting worse!

Again a bit of history first . . .

The Additional State Pension or State Second Pension(S2P) is the successor to SERPS, the top-up pension scheme provided by the state and related to earnings.

In 1978 people with final salary pensions provided by their employers were allowed to opt out of the scheme. The government paid a regular rebate into their company pensions, to compensate for the loss of state pension rights. Then in 1988, the Tory government allowed savers with personal pensions to opt out as well.

How does State Second Pension work?

When you are working you can choose to build up an extra State Pension as well as the Basic State Pension.

This was previously called the State Earnings Related Pension or SERPs but is now known as the State Second Pension. SERPs was based on your National Insurance contributions record and the level of your earnings.

You could choose to contract out of SERPs; if you did so, the Revenue paid part of your National Insurance contributions directly to the pension provider of your choice to fund a separate pension scheme with them instead of increasing the amount in the Government SERPs scheme.

A similar option is available with the State Second Pension. However, from April 2012 there will no longer be the option of contracting out.

The State Second Pension does not apply to you if you:

• are self employed or you do not work at all, or
• earn less than £5,044 for 2010/11.

In that case, you may want to make separate pension arrangements.

Normally you would want to consider taking out an individual personal pension. However, you should consider that you will only get the basic State Pension.

Make sure to double check that you are paying enough into your pension scheme in order to cover the missing additional State Pension.

The idea with the S2P is that this gives employees earning to around £31,800 (for 2009/10), and those with a long-term illness or disability, a better pension than SERPs would have done with those on lowest incomes benefiting the most.

From April 6th, 2010, S2P benefits for millions of workers has been decreased. More than 6 million people earning more than £31,800 a year will have build up a ‘smaller’ S2P.

The government froze the upper earnings limit for eligibility for the S2P at £40,040 a year earlier (previously it had moved up each year), while the rate at which S2P builds up has halved from 20 per cent to 10 per cent above £31,800.

The cut won’t be matched with a corresponding decrease in National Insurance contributions. Instead, from April 2011, National Insurance premium will increase by 1 per cent from 11 per cent to 12 per cent.

In addition, unlike with the basic State Pension, the Government has refused to increase the State Second Pension by 2.5%. This could cut pension benefits by £400m a year.

Finally, by 2030, S2P will build up at a flat rate, so everyone will get the same, no matter what they earn. Millions of pensioners will see no increase to the value of their State Second pension.

With a State Pension based on salary becoming a thing of the past, it increasingly means that the more you earn, the more responsible you must become for your own retirement.

If you are earning less than about £13,900 a year (for 2009/10) or are close to retirement, it may be worth staying in the S2P scheme and putting any spare money in a savings account such as an ISA.

This may be better than investing in a personal pension scheme and incurring charges payable to the provider and assuming all the risk yourself.

However the best choice for you will depend on your own circumstances and how long you have left to retirement and also if you are close to retirement already, how annuity rates are performing etc.

You may need to contact an independent financial adviser but check first what charges might be involved particularly if you end up not buying a product from the adviser.

For more information on getting additional State Pension

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