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Pensions glossary

Second State Pension

The second state pension is available to employees (excluding the self-employed) in the UK on top of the standard state pension.

This second state pension offers employees an extra amount based on how much they earned over their working lives. The more money paid into national insurance the more money paid out after the state retirement age.

The second state pension replaced the previous state earnings-related pension scheme (Serps) in 2002. People can choose, however, to take the money they are paying into the second state pension automatically, and have it paid into a private scheme instead (known as "contracting out").

People who contracted out have part of their national insurance contributions directed to their own pension plan instead of to the state scheme.

The idea behind this scheme is that investing the second state pensions contribution in the stock market could produce a bigger return than the state scheme.

But experts have recently warned that this is not necessarily the case, and when poor returns are added to charges by pension providers, consumers could lose out.


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