Leaving the additional State Pension (SERPS and the State Second Pension)

The Additional State Pension was described earlier in the guide.

If you work for an employer, you can take out a personal pension to replace the additional State Pension. This is known as ‘contracting out’ of (leaving) the additional State Pension. If your personal pension is contracted out, both you and your employer will still pay National Insurance contributions at the full rate. However, the Inland Revenue will pay a National Insurance contribution rebate direct to your personal pension. The amount of the rebate will depend on your age (the older you are, the higher the rebate will be) and your earnings. The Inland Revenue will also pay tax relief on your share of the rebate.

These Inland Revenue payments are called ‘minimum contributions’. Once the Inland Revenue gets information about your earnings from your employer at the end of the tax year, they will make a payment of minimum contributions direct to your personal pension. A personal pension taken out in place of the additional State Pension is called an ‘appropriate personal pension’ (APP). For more information on minimum contributions to APPs, see Employee's guide to minimum contributions (CA17). Click here for details about how you can get a copy of this guide.

A person contributing to a contracted-out personal pension who earns less than £11,600 (in the tax year 2004/05) will also get some State Second Pension. This is because of the extra help that the State Second Pension gives to lower-paid people.

Rebate-only personal pensions

Some personal pensions are ‘rebate-only’. This means that the only money being paid into the personal pension is the National Insurance contribution rebate and any related tax relief.

If you have this sort of second pension, it is meant to do no more than replace the additional State Pension. You should consider whether this will be enough to support the lifestyle you may want in retirement and whether you need to pay for an extra pension. If you do make additional pension arrangements, you will get tax relief on your contributions.