Beginner's guide to: State second pension (S2P)

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The Independent Online

What is the state second pension?

The state second pension – which is abbreviated to S2P – is an earnings-related scheme paid on top of your basic state pension. It used to be known as the state earnings related pension scheme (Serps).

Does everyone get it?

All employees contribute to S2P as they make National Insurance contributions (NICs). However, if you're self-employed, you may need to set up a standing order to ensure that you are up to date with your contributions. Since 1988, everyone has had the option of contracting out of the scheme – which means that rather than accruing an entitlement to a bigger state pension at retirement, the Government pays you back a proportion of your NICs every month – which can then be invested into a personal or stakeholder pension, or into your company scheme, if you are a member of a money-purchase plan.

How do I know whether to contract out?

Over the past 10 years, the Labour government has reduced the amount of the rebate paid to people who contract out. Most financial advisers agree it's no longer worth contracting out – and if you are already contracted out, you should consider contracting back in. If you're a member of a final salary scheme, the decision to contract in or out will be made for you.

Are there any risks to being contracted in?

The main risk of staying contracted in to S2P is that by the time you reach retirement, the Government could have reformed the pension system again, and decided to reduce the amount it pays. The advantage of being contracted out is that you can reinvest your money as you wish now – and if the Government does change its mind, it won't affect you. If you're over 50, the case for being contracted in is strong, as the size of the contracting-out rebates will not increase beyond that age.

How can I find out if I'm contracted in?

Call HM Revenue & Customs on 0845 915 0150. You will need your National Insurance number to hand.

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