Contracting Out Of SERPS

If you decide to contract out of the State Second Pension (S2P), which replaced the State Earnings Related Pension Scheme (SERPS) in April 2002, the portion of your National Insurance contributions that would have gone into this scheme is, instead, directed into either your company scheme or your personal pension.Many members of occupational pension schemes are contracted out of S2P.

Instead of receiving S2P from the state, a replacement pension comes from the scheme. In final salary schemes it matches the S2P given up; in money purchase schemes its value depends on investment performance.

Holders of personal pension plans may use them to contract out of S2P, which is replaced by the personal pension. The value depends on investment performance. The decision whether to contract out or not will depend on your age and earnings. In general, to benefit men should be under the age of 40 and women under age 35 but you should seek independent financial advice before taking this step. Revised rebate tables for S2P represent poor value for older employees. Those with less than ten years to go before reaching the state retirement age may wish to consider opting back in to the state scheme.

In the case of final salary pension schemes your national insurance contributions will be lower if you are contracted out. With money purchase schemes and personal pensions, a rebate of national insurance contributions will be paid to the schemes by the Department for Work & Pensions .

Last Updated: May 2007 © Moneyextra.com

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