The State Second Pension (S2P)

The State Second Pension (S2P) is the third and current State pension scheme which provides an earnings related pension in addition to the basic State pension.

The Child Support, Pensions and Social Security Act 2000 introduced S2P, which replaced the State Earnings Related Pension Scheme (SERPS) with effect from 6 April 2002.

Individuals who paid into SERPS between 1978 and 2002 are still entitled to take these benefits when they reach State pension age (SPA).

Individuals will be entitled to receive their S2P benefits from SPA.

The eligibility to contribute to S2P is broader than under SERPS. The following are eligible:

Employees will be eligible to S2P, but the method of calculation will predominantly benefit those earning no more than the lower earnings threshold (LET). For the current tax year (2008/09) this is £13,500.
S2P will be available for the first time to ‘carers’, who are those with no earnings or earnings below the lower earnings limit (LEL), set at £4,680 for the current tax year (2008/09), if:
They receive child benefit for a child under the age of six.
They are entitled to receive the invalid care allowance.
They are given home responsibilities protection because they are caring for a sick or disabled person.
S2P will also be available to the disabled. The disabled are defined as those entitled to incapacity benefit or severe disablement allowance.

S2P will be based on an individual’s earnings as follows:

Anyone earning less than the LET (£13,500 for the current tax year (2008/09)), but at or above the LEL (£4,680 for the current tax year (2008/09)) will be treated as if they had earnings equal to the LET.
Carers and the disabled, as defined above, will also be treated as if they had earnings equal to the LET.
If earnings are above the LET, then the S2P calculation will be based on upper band earnings (i.e. earnings between the LEL and the upper earnings limit (UEL)).

There will be two stages to the calculation of the S2P. The first stage (which started on 6 April 2002) is earnings related and the second stage will be a flat rate scheme.

Calculation of the S2P during the first stage

The first stage of the S2P is the earnings related stage. During this first stage, the calculation of the S2P will be divided in to three bands. Different accrual rates will apply in each of the three bands as detailed below:

Band One

Anyone earning between the LEL and the LET, carers and the disabled as defined above, will accrue S2P at a rate of 40% over a full working life time.
The 40% will be based upon the difference between the LEL and the LET (£8,820 for the current tax year (2008/09)).

Band Two

Anyone earning between the LET and the upper earnings threshold (UET) (£31,100 for the current tax year (2008/09)) will accrue S2P over a full working lifetime as follows:

40% on earnings between the LEL and the LET; plus
10% on the balance from the LET up to the UET.

Band Three

Anyone earning above the UET will accrue S2P over a full working lifetime as follows:

40% on earnings between the LEL and the LET; plus
10% on earnings between the LET and the UET; plus
20% on earnings between the UET and the UEL (£40,040 for the current tax year (2008/09)).

SERPS

Individuals will be no worse off under S2P than they would have been under SERPS.

In respect of the three bands described above:

Carers, the disabled and anyone earning between the LEL and LET will have a S2P entitlement that is double the entitlement under SERPS.
Anyone earning more than the LET, but less than the UET, will still be better off than they would have been under SERPS, but the largest proportionate gain will be to those on the lower levels of earnings.
Anyone earning above the UET will receive the same accrual rate as SERPS.

It is explained in the section on SERPS, that the accrual rate will be gradually reduced from 25% to 20%, for individuals reaching SPA between 6 April 2000 and 5 April 2009. To ensure that individuals are not worse off under S2P, similar transitional arrangements apply to S2P.

Anyone reaching SPA before 5 April 2009 will have extra accrual rates, which in terms of the current tax year (2008/09), will give them:

An extra 1% on the difference between the LET and the LEL (i.e. £13,500-£4,680 = £8,820);
An extra 0.25% on earnings between the LET and the UET (i.e. £31,100-£13,500 = £17,600);
An extra 0.5% on earnings between the UET and the UEL (i.e. £40,040-£31,100 = £8,940) for each year that the individual’s SPA is earlier than 2009/2010.

Calculation of the S2P during the second stage

From 2007, S2P became a flat rate scheme, although it is still based on earnings related contributions. The intention is that State pension provision in retirement will concentrate on those with lower earnings, with those with moderate and higher earnings making their own funded pension provision.

For more information, please contact us.