The State Second Pension (S2P) Explained

The following explanation is based on the current S2P provisions but you will see from the comment at the end of the Factsheet that the Government is considering changes to the state pension.

Currently

National Insurance state retirement pensions in the UK are composed of two main elements: a flat rate Basic Pension (currently £5,310 per annum for a single pensioner) and earnings related Additional Pension. In the past this Additional Pension was known as the State Earnings Related Pension Scheme (SERPS) but in 2002/2003 the basis of calculation was changed and the new earnings related Additional pension, known as the State Second Pension (S2P) was introduced. It currently has two different accrual rates for two different bands of earnings. These two bands in the 2011/2012 tax year are set at the following levels:-

Band 1 - covers earnings from £5,304up to £14,400 and benefit accrues at a rate of 40%. Those earning less than the £14,400 are treated as though they had earned £14,400.

Band 2 – covers earnings between £14,400and £40,040. The accrual rate is 10% for earnings within this band.

The benefit calculation is based on a three-step process which is detailed below:-

  1. Earnings for each tax year are split across the bands and revalued in line with the changes in average earnings from the tax year in question up to the tax year before the employee reaches State Pension Age (SPA) (earnings in the tax year before SPA are not revalued).
  1. The revalued earnings at SPA in each band are then multiplied by the accrual rate applicable to that band.
  1. These revalued earnings are divided by the total number of years in the individual’s working life since 1978 to give the S2P benefit. Working life is defined as being from age 16 to SPA.

The example below show how this broadly works in practice assuming earnings are revalued to State Pension Age at approximately 2.5% per year.

Julie, age 55 has earnings of £22,000 and a working life of 49 years.
Calculation of earnings in each band for 2011/12 tax year.
Band 1 – (£14,400 - £5,304) = £ 9,096

Band 2 – (£22,000 - £14,400) = £7,600

Assume that the revalued earnings are £11,644 and £9,728 respectively.
Band 1 - £11,644 x 40%/49 = £95.05 per annum

Band 2 - £9,728 x 10%/49 = £19.85 per annum


Total S2P benefit for 2011/12 tax year is £114.90 per annum. This calculation is repeated for each year of working life.

In the future

Whereas the upper limit for Band 1 (£14,400) will increase each year in line with national average earnings, the upper limit of Band 2 (£40,040) is fixed. Eventually the 10% accrual component will be withdrawn around 2030, leaving a wholly flat-rate benefit.

The State Pension Age

Current State Pension Age

The current age you can take your state pension from is:-

·  For men, the current State Pension age is 65.

·  For women, the current State Pension is increasing from 60 to 65 from April 2010 to April 2020. This affects women born on or after 6 April 1950

The current law also provides for the State Pension Age to increase to:

·  67 between 2034 and 2036

·  68 between 2044 and 2046

Proposal to increase State Pension age to 66

The government has published new proposals for increasing the State Pension Age to 66.

·  Women’s State Pension age will increase more quickly to 65 between April 2016 and November 2018.

·  From December 2018 the State Pension age for both men and women will start to increase to reach 66 by April 2020.

These proposals affect you if you are one of the following:

·  A woman born on or between 6 April 1953 and 5 April 1960

·  A man born on or between 6 December 1953 and 5 April 1960

These proposed changes are not yet law and still require the approval of Parliament. The proposed timetable for these changes is:-

Proposed changes for women

Date of birth / Date State Pension age reached
6 April 1953 to 5 May 1953 / 6 July 2016
6 May 1953 to 5 June 1953 / 6 November 2016
6 June 1953 to 5 July 1953 / 6 March 2017
6 July 1953 to 5 August 1953 / 6 July 2017
6 August 1953 to 5 September 1953 / 6 November 2017
6 September 1953 to 5 October 1953 / 6 March 2018
6 October 1953 to 5 November 1953 / 6 July 2018
6 November 1953 to 5 December 1953 / 6 November 2018

Proposedchanges for women and men

Date of birth / Date State Pension age reached
6 December 1953 to 5 January 1954 / 6 March 2019
6 January 1954 to 5 February 1954 / 6 July 2019
6 February 1954 to 5 March 1954 / 6 Nov 2019
6 March 1954 to 5 April 1954 / 6 March 2020
6 April 1954 to 5 April 1960 / Your 66th birthday

Proposed changes to increase beyond the age of 66

The government is also considering how the State Pension Age should be changed in the future.This may mean the timetable for increases to 67 and 68 as mentioned above will be revised.The government will bring forward proposals in due course. Any change to the timetable would require the approval of Parliament.

Proposed changes to the State Pension/s

On the 23 March in the detail of the Chancellor’s budget document, it was noted that the Government will consider reforming the State pension for future pensioners to provide simple, contributory, flat-rate State pension combining both the Basic Pension and the Additional Earnings Related Pension (£140 per week has been suggested) above the level of means-tested benefits. Since the Budget the DWP has released a Green paper entitled a State Pension for the 21st Century. It discusses and seeks views on options for achieving a more simple, ‘flat-rate’ State pension.