Changes and choices

Sick and disabled people and their carers benefit from 
State Second Pension

The biggest change in state pensions for a generation began on April 8^th 2002. From that date, a new pension replaced the State Earnings Related Pension Scheme (SERPS) which was introduced by Barbara Castle in 1978. It is called State Second Pension and for the first time mothers of young children as well as many sick or disabled people and the carers who look after them will now earn extra state pension even though they are not able to work or pay National Insurance contributions.

SERPS is an earnings-related top-up to the basic state retirement pension. Although the average SERPS paid out is a modest £15 a week, the maximum is more than £130. Anyone who has been paying into SERPS up to April 2002 will keep the SERPS they have earned and it will be paid when they reach pension age. But from April 2002, anyone paying full National Insurance contributions into the state pension scheme will be earning State Second Pension instead of SERPS.

The first people to get any State Second Pension paid will be those who retire in April 2003. On top of their basic state retirement pension they will get SERPS based on earnings and contributions for the years up to 2001/02 and State Second Pension for the years from 2002/03 onwards.

Anyone who is already retired and gets some SERPS is not affected by this change – their SERPS will carry on being paid as now. The amount of SERPS is listed under the heading ‘additional pension’ on the pension book or the annual letter from the DWP.

Like SERPS, State Second Pension is an earnings related, extra pension paid on top of the basic state retirement pension. However, State Second Pension has four big advantages over SERPS.

· A person who is caring for someone else can earn an extra pension of around £1 a week for each year they are a carer. Under SERPS they got nothing.

· A person who cannot work because they are long-term sick or disabled can also earn a pension of around £1 a week for each year they are too sick to work. Under SERPS they got nothing.

· Someone earning between £3900 and £10,800 will earn a pension as if they were earning £10,800 – they will earn a pension of around £1 a week for each year they pay into the scheme. Under SERPS they would have got far less – at most half of what State Second Pension will pay.

· Anyone earning up to £24,600 will get more State Second Pension than they would have got under SERPS. And no-one who pays into the State Second Pension will earn less pension than if they were paying into SERPS.

To earn State Second Pension you have to qualify and be under state pension age – 60 for women and 65 for men – for the whole tax year.

If you spend at least 35 hours a week looking after someone who is severely disabled and you are under pension age, you may be able to get a weekly benefit called invalid care allowance. If you do, then you may now earn entitlement to the state second pension for each year you get invalid care allowance. The same will apply if you get income support and do not have to sign on for work because you are caring for someone with a long-term illness or disability. The rules will also help you build up entitlement to the basic state retirement pension.

Although most people will get these advantages, women who chose to pay the reduced married woman’s National Insurance contributions while in work will not. Women in this position should get leaflet CA13 National Insurance contributions for Women with Reduced Elections from their local Inland Revenue office and fill in and return Part A of the form CF9 in the back of the leaflet. That will ensure that credits for State Second Pension are paid and will help protect their entitlement to the basic state retirement pension as well.

Mothers – or fathers – of young children can also build up entitlement to State Second Pension even if they do not work. To qualify they must have a child under 6 living with them and be named as the person who receives child benefit for that child.

· State Pensions for Carers and Parents – Your Guide PM9, March 2002 Department for Work and Pensions.

· www.pensionguide.gov.uk

More than five million people have chosen to stop paying in to SERPS or State Second Pension and pay into a personal or stakeholder pension instead. For younger people this choice may have been a sensible one. However, some actuaries are now saying that younger people would also be better off paying into State Second Pension – particularly if their earnings are below £24,600. And everyone agrees that women aged 49 or more and men aged 54 or more should certainly start paying into the State Second Pension.

If you have contracted out of the SERPS you should consult a financial adviser and consider carefully if you should choose to start paying in to the State Second Pension in 2002/03. The amount you get from the state will be inflation-proofed and guaranteed and is likely to be more than the amount you will get for the same contributions paid into a personal pension invested on the stockmarket. You can, of course, still pay into a personal or stakeholder pension on top of paying in to the State Second Pension. If you can possibly afford it you should start paying into State Second Pension and carry on paying as much as you do now – or even more – into a personal or stakeholder pension.

People who pay into a company pension scheme which has contracted out of the earnings related state pension cannot choose to start paying into the State Second Pension. If their employer pays contributions into their company pension they are almost certainly better off staying in that.

May 2002

e-mail Paul Lewis on paul@paullewis.co.uk