Serps

What is SERPS?

State Earnings Related Pension Scheme (SERPS), formerly known as the State Earnings Related Pension Supplement, was a pension scheme that was operated by the government until April 2002. It was then replaced by the State Second Pension scheme, which aimed to improve pensions for those on a lower income.

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SERPS was intended to increase the amount of money which you would receive upon retiring at the state pension age, in addition to the amount paid on the basic state pension.

If you made Class One National Insurance Contributions (NICs) between 1978 and 2002, then you are entitled to SERPS. However, this may conflict with your occupational pension scheme meaning that you have been mis-sold SERPS related pension schemes.

If you were offered final salary pension schemes between 1988 and 2002, then this was because employers were inclined to contract out their employees from SERPS, as it meant that they would pay less national insurance contributions. In what seemed like a situation in which both the employer and employee would benefit, the employer had to provide a final-salary pension plan to their employee with benefits within that so that employees could opt out of SERPS.

Employees were therefore guaranteed a state earnings-related pension scheme when they retired while at the same time employers paid less national insurance contributions. However, if an employee chose to opt out of SERPS, this meant that employers could reduce or stop their SERPS payments. What this meant in practice is that many people could have surrendered an additional income at retirement worth thousands of pounds.

This opting out process was expanded to include pension schemes or investments of different types. This then provided fewer guaranteed benefits to employees that chose to opt out of SERPS.

In most cases, mis-sold State Earnings Related Pension Schemes relate to this later period. This is because pension holders received a lot less money by joining a private pension scheme.

Have I been mis-sold SERPS?
If you are one of the many people who opted out of SERPS during the periods mentioned, then you could be due compensation. Many people in the UK do not realise that they could make a claim for mis-sold SERPS compensation because of the poor advice given to them by financial advisers or brokers.
Many of the people entitled to SERPS compensation were given the advice to opt out of SERPS between 1st July 1988 and 5th April 1997. They were known as the pivotal age because they contracted out of SERPS when they would have been older than 40 for women and 45 for men. If you fall under this category and have suffered financial loss because you were mis-sold SERPS opt out because of incorrect advice, you could be eligible to make a claim for SERPS compensation.

Am I entitled to SERPS compensation?
More and more people started to opt out of SERPS in 1988 when employers were in a position where they needed to provide more for their employees upon retirement. This motivation for companies to offer their employees more could have caused an increase in mis-selling of SERPS related private pensions. This is because private pension schemes should not be provided so that they reduce the amount of money a company is spending. Instead, private pension schemes should be provided to individuals to support them after retirement.

In many cases, opting out of SERPS to join a private benefits scheme did not result in a significant loss of money, and final-salary pension schemes often provide a positive return for individuals who are retired. However, one of the most common situations of mis-sold SERPS is when you have opted
in favour of investments that depended on the performance of the stock market. If this was the case, then you could be financially worse off as a result, and this would mean that you are entitled to

SERPS compensation.
You will need to determine if your private pension scheme was mis-sold to you by an independent financial adviser or by your employer. To do this, you can contact the company that sold you the financial product directly and ask them the difference between your SERPS entitlement compared to
your actual pension. If they do not give you the answers you are looking for, then it is best to take your claim to the Financial Ombudsman Service so they can take your SERPS claim further.

Opting out of SERPS?
Opting out, or contracting out, was a popular process because financial advisers who recommended this to their clients received a commission if they signed up to it. This meant that some individuals made contributions to a private pension scheme and at the same time reduced or removed their
entitlement completely to SERPS.

As stated previously, this was done by employers because it meant that they would pay less in National Insurance. Opting out was only available for people who made contributions to final-salary pension schemes, but it was broadened to money purchase schemes in 1998.

If you contracted out or opted out after March 1997, then you will not be eligible for SERPS compensation for an earnings-related pension scheme after that point. If you opted out before that, you could qualify for mis-sold SERPS compensation because your entitlement will be reduced in line
with the deduction.

How can I claim compensation for Mis-sold SERPS?
The process of claiming for SERPS compensation is rather complex and needs to be done in stages.

Firstly your ‘surplus earnings’ will need to be calculated. This is done by working out the difference between the upper and lower earnings brackets for each of the tax years for which you opted into a SERPS. This summary will always rise until you reach retirement age.

Then your total earnings for each tax year between 1978 and 1988, even if you did not opt-in during many of those years, will be calculated. This number will be divided by four, and the sum of your total earnings between 1988 and 2002 will be divided by five before the two figures are added
together.

The summary of the two numbers will then be divided by the however many tax years passed between 1978/79 and the year in which you reached state retirement age. Once this is worked out, it will show the final figure which is how much you will be entitled to your SERPS compensation.

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