Contracting Out, SERPS, S2P & all that

The powers that be are ending 'contracting out' from 6 April 2012

What does this mean?

Many people have built up pension pots since the 80s based on the fact they contracted out. This pension was known as ‘protected rights’. What happened, in simplistic terms, was rather than have a portion of their National Insurance (NI) contributions build up a second state pension (not to be confused with the basic state pension, which is not affected by this) their NI was diverted into a separate pot often alongside their personal pension contributions from earnings. The personal contributions were known as ‘non-protected rights’ or ‘ordinary benefits’. This could even be done if you didn't make any personal contributions yourself. I remember meeting a pension salesman in the mid 90s who built his entire career based on contracting out New Zealanders whilst they worked here in the UK.

The contracting out pension was once referred to as SERPS (State Earnings Related Pension Scheme) and in more recent times S2P (State 2nd Pension).

From 6th April 2012 there will no longer be the option to ‘contract out’ of S2P.

The change won’t affect any past benefit accrued in the tax years before 6 April 2012 – they’ll remain invested in the same way you have them now. However, there will be more flexibility over how you draw the benefits from the pension.

The rules and flexibility over accessing SERPS and S2P have changed in recent years. The latest big change is that at the moment (pre April 2012) you are forced to take a pension that also pays a pension to your spouse or civil partner when you die but after April 2012 this will no longer be the case – although you could if you wanted to of course.

Further reading is available on the Government website :
www.direct.gov.uk/en/pensionsandretirementplanning/statepension/DG_180010

What do you have to do now?

For most people the answer is nothing, the changes happen automatically.

However now might be a good time to review your pension contributions and what you might expect from your pension when you retire to see if it will be sufficient for your needs. It is important now, more than ever, to work out as best you can what the state will provide and therefore what gap needs to be made up personally.

I have more information on how I can help in reviewing your pension on my website:
http://www.iangreen.com/pensionperformance.php

Or my Guide to retirement guide on facebook:

http://www.facebook.com/media/set/?set=a.279745942051519.88838.136170059742442&type=1&l=e9d045b20c

(also available with many other guides here http://www.iangreen.com/education.php )