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Contracting Out In 1978 the State Earning Related Pensions (SERPS) were introduced to replace Graduated Pensions. They were originally intended to pay an extra pension of up to 25% of the earnings of an individual who earned between the Lower Earnings Limited (LEL) and the Upper Earnings Limit (UEL) for National Insurance Contributions. This level of earnings for an individual for any year is called the band earnings because it is this band of earnings that earns the extra pension. The LEL each year is about the same amount as the state basic pension and the base rate tax threshold. The UEL is about six times that amount. This pension was earned at the rate of 1.25% a year for a maximum of 20 years. However, projections were that because people were living longer and the cost of providing a pension was increasing, the country would not be able to continue to afford this level of pension into the 21st century. In order to ease the problem the level of pension was reduced to 20% of band earnings, it was earned over a lifetimes average earnings and only half of it could be passed on to a spouse on the death of the original contributor. Because this last change on death was poorly communicated to the public the government has now said it will delay introducing the change. According to the most recent government press releases on pensions State Second Pensions are intended to replace SERPS "within the next few years". They are to provide a better state second pension than SERPS for employees on low earnings. It was possible for final salary schemes to contract out of the Graduated Pension Scheme and of SERPS from 1978 to 1988. Therefore if you were in a 'contracted out' final salary scheme for some years you would not have earned extra state pensions for the years you were a member of that scheme. From 1988 onwards (backdated to 1987) it was possible to contract out of SERPS with a Contracted Out Money Purchase (COMP) company pension scheme or with a Personal Pension Scheme. Originally it was suggested that males under age 50 and females under age 45 would probably be better off by contracting out of SERPS. Whether or not someone is better off depends on the charges taken out of the contracting out pension contract, the investment return achieved on their investments and the annuity rates at retirement which determine how much pension their accumulated fund will buy. It also depends on the inflation rate over the intervening years as SERPS, if left with the government, are inflation proofed. Insurance companies have analysed the investment and other performance factors over various periods to try and establish what likelihood there is of gaining from contracting out and what level of gain there is to be achieved by contracting out. It will ultimately depend on an individuals attitude to risk as to whether or not they should contract out. Remaining in the government scheme will probably be the option chosen by people who are not prepared to take some risk with their pension. It is NOT currently possible to contract out of the state basic pension. This remains the cornerstone of pension planning and neither of the main political parties have suggested any intention to scrap the basic pension. Any years of SERPS for which you have already paid National Insurance and not contracted out of SERPS and any years in the future where you contract back into SERPS will continue to be paid at retirement age direct by the UK Government. It is only years for which you choose to contract out that you have a private pension. Contracting out may be of particular interest to homosexual couples or individuals who have a short life expectancy as there is more flexibility to pass on the pension fund to nominated people within a private pension than within the state system. If you would like a forecast of your state pension fill in form BR19 and send it to the DSS in Newcastle. BR19 State Pension Forecast Form Details of form BR19. To obtain a forecast of your own state pension directly from the DSS/DWP |