What is a SERPS pension & can I cash it in?

The state earnings related pension scheme (SERPS), also known as the ‘additional state pension,’ operated between 1978 and 2002. It was replaced by the state second pension, which ran until 2016.

If you retired before April 2016, paying into SERPs could result in a higher state pension. But it was possible to opt-out, known as “contracting out,” and lose the extra entitlement.

As a result, key questions for many retirees are:

• Did I ever opt out of SERPS? If so, how did this affect my state pension?
• Do I have any SERPS-related pension pots that I’ve forgotten about?

We reveal the answers to all these questions in this article.

What is SERPS pension?

The State Earnings Related Pension Scheme (SERPS) allowed people to increase their state pension income.

They could achieve this by building up ‘additional state pension’, based on their level of earnings over their working life.

However, it was possible to opt out of SERPS or the Second State Pension (known as ‘contracting out’) in order to enhance your workplace pension or private pension instead.

This means that if you were working between 1978 and 2016, you may have been contracted out for some of this time, if any of your workplace pensions offered this option.

What does it mean to be contracted out of a SERPS pension?

To be eligible for SERPS, you had to be employed and paying Class 1 national insurance (NI) contributions (it wasn’t available to the self-employed).

If you were part of a personal or company pension scheme, it's likely you were ‘contracted out’ of SERPS.

Contracting out meant you paid lower NI contributions, with your employer or pension scheme investing the savings into an alternative pension plan, known as a ‘protected rights pension’.

The idea was that this alternative pension would hopefully provide you with a pension pot that was larger than the one you would have received from SERPS.

Some workplace pension schemes would offer you the option of contracting out of SERPS. Others would contract you out automatically, often without you having to make a decision.

As contracting out of SERPS did not involve making any additional payments, you may not know if you have a protected rights pension or not. Note that as of 2012, protected rights pensions were merged into the general pension pot and no longer have a separate status.

Was I contracted out of SERPS? If so, how do I find my protected rights pension?

You may not know whether your company pension membership meant you were automatically contracted out. It may even be that you chose to contract out while you were a member of a workplace or personal pension and have forgotten about making this decision.

Your first task is to find this out, which a financial adviser should be able to help with.

Alternatively, you can check your NI record or contact the Pension Service to determine whether you were contracted out.

Find out more about tracking down old pensions.

What is the maximum SERPS pension I can get?

The maximum additional state pension you can get in 2024 is £218.39 per week, but most people won’t get this much, as it depends on factors such as how much you earned and for how long you were contracted into SERPS.

Can I pay into SERPS today?

SERPS ended in 2002 and was replaced by the state second pension, which operated in a similar way.

This ended in 2016 and was replaced by the ‘new state pension,’ so you can no longer contribute to SERPS.

How does SERPS affect the state pension I receive?

The state pension income you receive is based on your national insurance contributions. Here is a summary of the rules, which changed in April 2016.

If you reached state pension age before April 2016:

• You receive a basic amount based on the number of qualifying years you paid NI contributions.
• You receive an additional amount based on how long you paid NI, which included SERPs, your earnings and whether you were contracted out.

If you reached state pension age on or after April 2016:

• Your state pension income is based on the number of qualifying years you paid NI contributions.
• Your state pension may be adjusted based on your state pension entitlement under the previous system and if you were “contracted out” during your working life.

Note that contracting out was no longer possible after 6 April 2012 except for some final salary schemes.

If you would like to increase your state pension because you aren’t eligible for the full amount, possible ways to include:

• Carrying on working past your state retirement age.
• Claiming NI credits. You may be eligible for these if you stopped working for a period, perhaps to raise a family or because of illness.
• Paying voluntary NI contributions to fill in gaps when you weren’t working.

Can I inherit a SERPS pension?

The SERPS inheritance rules may allow you to receive a significant additional income if your spouse or civil partner passes away.

The current rules allow you to receive between 50% and 100% of your spouse’s SERPS pension:

So, if your spouse is a woman born on 5 October 1942 or before, you can inherit all her SERPS pension when she dies. However, it’s important to note if your spouse passed away before reaching the state pension age, different rules may apply.

You can’t inherit a spouse’s SERPS if you remarry or form a new civil partnership before your state pension age.

You can only inherit a maximum of 50% of the state second pension.

If you reached your state pension age after April 2016, the rules are different. If your spouse reached state pension age after April 2016 and died after April 2016, you won’t be able to inherit any additional payments.

Can I cash in my SERPS?

You can’t ‘cash in’ your SERPS. The additional state pension is only ever paid along with your basic state pension, usually directly into your bank account.

The income is guaranteed for life, meaning it will never run out.

It can be confusing if you have read elsewhere about ‘cashing in’ a SERPS pension.

This however refers to protected rights pensions (i.e. the pension pot(s) that you’ll have if you ever opted out of SERPS or S2P).

You can access a protected rights pension like any other defined contribution pension pot, from the age of 55.

Some people will lazily refer to protected rights pensions as ‘SERPS pensions’ and talk about cashing them in.

It’s important to understand that this refers to the pension pot(s) you have built up by not being in SERPS, rather than SERPS itself.

Find out more about how pensions work.

You can also calculate how much income you might need for retirement using our helpful pension calculator.

Get expert financial advice

Understanding your SERPS pension and whether you were contracted out is essential for effective retirement planning.

While you can't cash in your SERPS pension directly, knowing how your protected rights pensions work and how they affect your state pension is crucial.

It’s wise to keep track of your pension entitlements and seek advice to maximise your retirement income. With the right information and planning, you can make informed decisions for a secure financial future.

Let Unbiased match you with a financial adviser for expert financial advice to help you navigate SERPS, explore any protected rights pensions, and make informed decisions about your retirement planning.