Ending of SERPS/State second pension

Thursday 31 March 2016

State second pension

Prior to 6 April 2016, some employees – but not the self-employed paying Class 2 national insurance contributions (NICs) – earned an entitlement to an additional earnings-related amount of state pension (the state second pension – S2P). Prior to 6 April 2012, they could choose to contract out of S2P and join a defined-benefit or defined-contribution workplace or personal pension scheme giving them equal or better rights in place of their S2P entitlement. In so doing they, and their employer (if applicable), paid lower rates of NICs, known as the “contracted-out rebate”. From 6 April 2012, it was possible to be contracted-out of S2P in a defined-benefit occupational pension scheme only (defined-contribution contracting-out having been abolished as part of the pension reforms that brought in the auto-enrolment provisions). From 6 April 2016, and as a consequence of the introduction of the single-tier pension, national insurance rebates for individuals in contracted-out defined-benefit schemes were abolished, which means an increase in NICs for employers and employees who are members of such schemes.

For employers this is equivalent to approximately 3.4% increase in costs. For employees approximately 1.4 % lower earnings. The average drop in pay has been calculated at £37 per month.

The variation will affect men born before 6 April 1951 and women born before 6 April 1953 who chose to ‘contract out’ of the state pension, at points where this was possible, to pay lower national insurance contributions. Those who reach state pension age on or after 6 April 2016 will receive the new flat-rate state pension.

It is recommended that employers communicate this change to any affected staff so that they can plan accordingly.