Changes to state pensions
The current changes have a considerable impact on state pensions, although the basic old age pension is not affected. The State Earnings Related Pension (SERPS), which has been in place since 1978, will be replaced by a new state pension which will be called the State Second Pension (S2P).
The S2P will be introduced in April 2002 and initially will be an earnings-related benefit. Longer term, the benefits from S2P will be flat rate, but probably not for at least five years.
The maximum benefits from the S2P will be higher than the pension currently available from SERPS, and the biggest increases will go to those on relatively low earnings. For example, for people who earn up to £9,500 a year, the benefits from S2P will be twice what they would otherwise have received from SERPS. The relative advantage of S2P over SERPS becomes smaller for higher incomes and at earnings of £21,600, the S2P benefits are the same as SERPS benefits.
It will continue to be possible to contract out of SERPS and, from 2002, people will be able to contract out of S2P by investing in a personal pension, occupational scheme or the new stakeholder plan.
