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SIPPS & SERPS: What’s the difference?

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When it comes to pensions things can get very confusing very fast especially when you factor in the jargon.


A self-invested personal pension (SIPP) is a pension ‘wrapper’ that holds investments until you retire and start to draw a retirement income. It is a type of personal pension and works in a similar way to a standard personal pension. The main difference is that with a SIPP, you have more flexibility with the investments you can choose.

SIPPs make it easier for you to manage your pension. You can monitor your pension online and make changes whenever you like. When you reach your 57th birthday you’re free to start withdrawing money from your SIPP, even if you’re still working. You can usually take up to 25% of your pot tax-free. The rest of your withdrawals will be taxed as income.

Investments go down in value as well as up so you could get back less than you invest. SIPPs were created to give experienced investors the opportunity to take more risks, but the general public should not have been encouraged to do so. When it came to light that a large proportion of the UK public were offered the opportunity to invest with SIPPs, the Financial Services Compensation Scheme (FSCS) set aside millions of pounds to pay compensation to those who were mis-sold.



SERPS stands for the State Earnings Related Pension Scheme, otherwise known as the additional state pension, which has now been replaced by the State Second Pension.

SERPS was introduced four decades ago in 1978 as a top-up to the basic state pension. The amount you’d receive from SERPS was related to your earnings over your working life, and you’d only be eligible for the scheme if you were an employee making Class 1 National Insurance Contributions. This meant that self-employed people were not eligible for SERPS.

When SERPS was originally introduced, the maximum benefit under the scheme was 25% of your earnings. Ten years later, the benefit calculations changed, and the maximum benefit was reduced to 20% of average earnings.

In April 2002, SERPS was replaced by the State Second Pension.


What’s Opting Out?

Many people chose or were advised, to opt out of SERPS and instead had their National Insurance rebates paid into a personal pension in the hope that this would provide them with better benefits at retirement.

If you were contracted out of SERPS your National Insurance contributions were:

  • Lower than people paying into SERPS
  • Paid into another pension, for example, a private pension.

Initially, only those who belonged to Defined Benefit or Final Salary pensions could contract out of SERPS, but in 1988, the government allowed those in defined contribution or money purchase schemes to opt-out as well.

People were offered incentives to leave SERPS, so for the first five years, the government contributed an extra 2% of your earnings into a personal pension.

In April 2012, only people belonging to Defined Benefit or Final Salary schemes were contracted out and paid a lower rate of National Insurance Contributions. Anyone belonging to a Defined Contribution scheme will have been contracted back in, paying National Insurance at the full rate. Contracting out for those with defined benefit pensions ended in April 2016.



A SERPS (State Earnings Related Pension Schemes) differs from a SIPP in that it was a pension scheme offered by the state rather than a personal pension plan. First introduced in 1978, SERPS have now been replaced by the State Second Pension.

A Self Invested Personal Pension (SIPP) is a personal pension scheme approved by the government, and they’ve been around since 1989. Since then, SIPPs have taken off with over 1 million UK citizens who are looking to grow their pension pots.


Can I claim against a SERP?

When FOS consider these complaints, they consider suitability as to whether to contract out of SERPS.  Firms use a “pivotal age” threshold, which is 45 for men and 40 for women so that consumers below this age threshold could find it beneficial to contract out. This was because the value of the National Insurance rebates, tax relief and government incentives obtained by contracting out could be greater than the value of the SERPS benefits given up.

For consumers above the pivotable age, there was less time for investment growth and therefore a greater risk that they would be worse off than if they had stayed in SERPS. Also, in considering the suitability of contracting out, the firm should have considered the clients earned income, as the rebates and other amounts received when contracting out were based on that income. People with lower incomes received lower rebates if any, and the charges the client would have to pay on a personal pension policy would have a greater impact.

At APJ Solicitors we work tirelessly to help those impacted by mis-sold SIPP investments and have achieved millions of pounds worth of compensation for the clients that we work with. However, we are unable to help those who are looking to claim against a SERP. You can find out more information regarding State Second Pension by visiting the Government website.

If you want to claim against a mis-sold SIPP you can do this yourself by visiting the FCA or FOS website. If you would like to work with our experts at APJ who can handle this case for you, we’d love to hear from you. Text CLAIM to 60650 to speak to an advisor.