Pensions top-up cost too much: The State Earnings Related Pension Scheme began as a top-up. Vivien Goldsmith reports

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The Independent Online
SERPS - the State Earnings Related Pension Scheme - was the creation of Barbara Castle in the 1970s. She wanted the state to deliver handsome pensions, so an earnings-related top-up to the basic state pension was launched.

This went un-noticed by most people until personal pensions were created in July 1988 and were kicked off with a great free offer. All you had to do was opt out of the state's promise to boost your pension, and you could get pounds 2,364 - the rebate for the previous and current tax year - put into your new personal pension.

People responded to the carrot in droves. In the first year, 2.5 million personal pensions were started using the rebate alone. Others started with funds from the rebate and added their own cash.

Serps, like a traditional company scheme, is related to your wages, while a personal pension depends on how well the investments perform. For the first five years of personal pensions the state added 2 per cent to boost the National Insurance contributions rebate to persuade people to leave Serps, which was getting too expensive to run.

The rebates are based on earnings between the lower and upper bands for National Insurance. These are currently pounds 56 to pounds 420 a week, but will rise to pounds 57 and pounds 430 in the next tax year beginning on 1 April.

The rebate is worth 4.8 per cent of those earnings (3 per cent from the employer's NI contribution and 1.8 per cent from the employee's), or 5.8 per cent for the over 30s, who get extra to dissuade them from rejoining the state scheme. This is boosted by tax relief to a maximum of 6.4 per cent. For the current year, the maximum rebate for those on pounds 21,840 or more is pounds 928.70.

The lower end of the earnings band which qualifies for Serps is pounds 2,912 a year, so the low-paid will have a substantial portion of their pay disregarded for Serps, and for the rebate.

The problem for the low-paid is that most personal pensions levy a fixed monthly policy charge, typically pounds 3. If the amount going into the pension is small then this fixed charge will erode any investment gains. Towers Perrin, an actuary, says anyone earning below pounds 10,000 should not have opted out of Serps. The Prudential says those earning under pounds 8,500 should remain in the state system.