This piece first appeared in The Daily Telegraph on 8 June 2002
The text here may not be identical to the published text

The goalposts are shifting yet again

Almost unnoticed, New Labour finally got rid of one of the central planks of Old Labour’s social security policy. The State Earnings Related Pension Scheme (SERPS) disappeared on April 8th this year, 24 years after it was introduced by the late Barbara Castle. SERPS was replaced by the State Second Pension, a scheme designed to fit in with a population who, the Government hopes, will save up for retirement through company or stakeholder pensions.

But around 8 million people still paid into SERPS and they will now be paying into the State Second Pension instead. In addition, around four million mothers, carers and disabled people who cannot work will also earn State Second Pension – they earned no SERPS. Self-employed people remain excluded from State Second Pension as they were from SERPS.

The other 15 million employed people have already chosen not to pay into SERPS. Instead, they are ‘contracted out’ and pay into a company or personal pension instead. They are given a 1.6% cut in their National Insurance contributions and, in some cases, extra money is also paid from the National Insurance fund into their personal pension. They will remain contracted out of the State Second Pension. Nervous insurance companies are now saying that anyone within 12 or 15 years of pension age who is contracted out should consider contracting back in, swapping the uncertainty of the markets for the uncertainty of future government policy.

When it was introduced, SERPS was supposed to provide security for all in retirement and match the best private pensions then available. But Labour watered it down before it began and two Conservative governments reduced the value of the pensions paid to barely a quarter of what was originally planned.

Now it has gone. Anyone who has paid into SERPS over the last 24 years – and most people who have worked in that time have some SERPS rights – will still get the benefits they have already earned. On average that is a modest £15 a week on top of the basis state pension of £75.50. But the maximum, for people who earned at the upper earnings limit for National Insurance contributions (currently £30,420 a year), is £131 a week, making a total state pension of nearly £11,000 a year. Like all state pensions, SERPS is taxable and fully indexed against inflation. Anyone under pension age who want to know how much SERPS they will get at pension age, can get a pension forecast from the Department for Work and Pensions by filling in form BR19. Or it can be done online.

From April 8th the 8 million people in work who are not contracted out have been paying into the State Second Pension. Like SERPS it is an earnings related pension, but it gives more to low earners and, for the first time, will give some extra pension to people who cannot work because they are sick or disabled, look after someone who is, or have a young child.

State Second Pension will not give anyone less than they would have got under SERPS and some people will get more. Anyone earning less than £10,800 a year will be counted as if they earned £10,800 and they will get State Second Pension of approximately £1 a week for each year they work. Anyone earning less than £24,600 a year will get more than they did under SERPS and people earning more than that will get the same amount under the State Second Pension as SERPS would have given.

However, all that will change in a few years’ time. The government has long term plans to scale back the State Second Pension and it will at some unspecified date in the future become a flat-rate addition to the state pension and will only be credited to people earning £10,800 a year or less. By then the Government hopes that everyone earning more than that will be contributing to a stakeholder pension – a vain hope in the light of recent figures showing very low take-up among the target groups in the first year of stakeholder.

The biggest change is that many people who are not working at all will nevertheless be ‘earning’ State Second Pension. Three groups of people will benefit if they are either not working or if they are working but earning too little to pay National Insurance contributions. They are

· A parent with a child aged less than six. The rule will apply to the parent who is named on the child benefit order book. So parents should ensure that the person without earnings who is caring for the child is the person named. If there are two children each non-working parent can be named as the recipient for one lot of child benefit and both will qualify to ‘earn’ State Second Pension.

· Carers who get invalid care allowance and some other carers who get what is called ‘home responsibilities protection’ which gives them some rights to the basic state pension as well.

· Ill or disabled people who get either long-term incapacity benefit or who get severe disablement allowance. In most cases they will also have to have paid full Class 1 National Insurance contributions for at least three tax years since 1978.

All three groups will be counted as if they earned £10,800 a year and that will bring them a State Second Pension of approximately £1 a week for each year they qualify.

There is one trap that married women should be aware of. If they paid the lower married woman’s National Insurance contributions they will not be counted into the State Second Pension. They should give up the right to pay the lower married woman’s stamp by filling in form CF9 at the back of Inland Revenue leaflet CA13 National Insurance contributions for women with reduced elections.

8 June 2002

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