State Second Pension

The State Second Pension (S2P), or Additional State Pension, was introduced in the UK by the Labour Government on 6 April 2002, to replace the SERPS (State Earnings Related Pension Scheme). The main aim of this change was to skew existing Additional Pension (or AP) benefits in favour of low and moderate earners at the expense of higher earners and to extend access to include certain carers and people with long-term illness or disability for the first time.

The Additional State Pension is to be replaced for new pensioners by the new State Pension with effect from 6 April 2016.

Before April 2002, AP was provided through the State Earnings-Related Pension Scheme, (SERPS). SERPS was a career average pension scheme, based on the band of earnings each year between a "LEL" or '"Lower Earnings Limit"' (£5,304 in 2011/12) and a "UEL" or '"Upper Earnings Limit"' (£42,475 in 2011/12). Any SERPS entitlement already built up is retained and revalued each year in line with the changes in average earnings (that is, in "real" terms) until State Pension Age. It is then added to any Basic State Pension payable, and the combined amount uprated thereafter in line with the index of retail prices (RPI).

S2P gives all employees earning up to £32,592 a year (in 2011/12) a larger pension than SERPS, regardless of whether they are "contracted out" or not - with most help going to those in the '"lowest"' earnings (up to £14,400 a year in 2011/12) - known as the "LET" or '"Low Earnings Threshold"'. The accrual rates within each band of earnings are:

Earnings in the lowest band are treated as though they were actually at the threshold of the next band. Thus, under SERPS, earnings of £10,000 a year would produce a pension of just £939 a year - 20 per cent of (£10,000 - £5304) - whereas under S2P the same earnings would lead to a pension of £3638 a year - 40 per cent of (£14,400 - £5304) - nearly four times as much. However, under SERPS earnings of £25,000 a year would produce a pension of £3939 a year - 20 per cent of (£25,000 - £5304) - but under S2P only £4698 a year - 40 per cent of £9096 plus 10 per cent of (£25,000 - £14,400). At the "3 x LET - 2 x LEL" threshold (£32,592 a year) SERPS and S2P pensions are equal and the same rate of accrual (20 per cent) applies above that.

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