A timely boost for low-paid workers - a second pension

A timely boost for low-paid workers - a second pension

If you're in a panic over pensions, there could be a silver lining in the shape of S2P, the state second pension. Formerly known as Serps - or State Earnings Related Pension Scheme - it can improve pensions for millions, and includes a special boost for low-paid (and many part-time) workers.

A woman about to claim a state pension, earning £20,000 a year, who has been working and qualifying for S2P since 1978 when she was earning £3,500, could see £70 a week more in her state pension payment. S2P is complex, has changed since it was introduced (as Serps) in 1978 and is due to alter again in 2012. Put simply, it's a top-up to the basic state pension, linked to working life earnings. It applies to all those in employment with the exception of two groups.

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Members of most final salary plans are excluded as they are "contracted out" of S2P - this element is paid in their employer-provided package. And some in money purchase plans have chosen to contract out with the S2P national insurance element going to a personal pension-style scheme.

But if you qualify, this is how it works. Each year, the government sets lower and upper earnings limits for national insurance payments - currently between £90 a week (£4,680 a year) and £770 (£40,400).

Earnings between these two count towards the S2P pot, but those earning between £4,680 and £13,500 are treated as if they earned £15,500 - a major uplift to those on low wages. But the better off will pay. From April 2009, the upper limit will be renamed the Upper Accrual Point and will not rise each year, eroding the pension for middle-income earners.

A percentage of each year's earnings turn into an S2P amount which is revalued each year by the rise in average salaries. When you retire, each year is calculated to give a weekly addition. Working it out can involve a spreadsheet.

• Ask for a state pension forecast at thepensionservice.gov.uk/state-pension/forecast/home.asp or phone 0191 2253375 (or 0845 3000 168).

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