I have £12,000 in a Serps pension. If I take it out at 55, will it affect my state pension?

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Question: I’m planning to take my Serps (State Earnings Related Pension Scheme) out in May when I’m 55 – I have £12,000. My wife will be 55 in April and she has £7,000 in her Serps. If we take both of ours out when we turn 55 will it affect our state pension later on in life?

Answer: It looks like you’ve become a bit confused about how the state pension works. Don’t worry about that, because the UK’s state pension system can be complex, with lots of jargon that most people won’t be familiar with.

A recent survey conducted by AJ Bell found just 12 per cent of respondents said their understanding of the state pension was “excellent”, compared with 20 per cent who admitted it was “poor”.

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Serps were part of the old state pension system, when entitlement was split between the basic element and an earnings-related element.

It existed from 1978 until 2002, when it was replaced by the “state second pension”, often referred to as “S2P”. Under Serps, you received extra state pension entitlement depending on your earnings, meaning higher earners were able to build up a substantial extra state pension beyond the basic amount.

When the state pension was reformed in 2016, S2P was scrapped altogether, with the government opting to instead create a single “new” state pension.

In order to be entitled to the full new state pension, which is worth just over £12,500 a year in 2025/26, you need to have a 35-year National Insurance contribution record.

It’s important to note that you are entitled to NI “credits” in certain circumstances, such as if you take time out of work to care for a child for an elderly relative.

If you’re unsure where you stand, it’s worth checking your state pension forecast. This shows how much state pension you’re currently on track to receive and highlights any gaps in your National Insurance record that could potentially be filled. You can check your forecast online at www.gov.uk/check-state-pension.

If you have built up Serps entitlement, you cannot take this out of your state pension as a separate payment before state pension age.

However, when Serps existed it was not provided automatically, with some employers choosing to contract employees (and themselves) out of the scheme in return for lower National Insurance payments. This may be the source of your understandable confusion.

Where someone was “contracted out”, the employer was required to offer an alternative pension arrangement that offered terms at least as generous as the Serps.

This was often a defined benefit pension paying a promised income in retirement based on the number of years someone was a member of the scheme and the scheme’s “accrual rate”.

However, it was also possible to be contracted out into a “defined contribution” scheme, such as a personal pension, where you build up a pot of money of your own to provide a retirement income, usually with the help of employer contributions alongside tax relief on contributions and tax-free investment growth.

If by “Serps” you mean the pension you built up as a result of being contracted out of Serps, assuming it is a defined contribution pot (which it likely is, given you have cited a pot value) you should be able to access it from age 55 if you wish, with a quarter available tax-free and the rest taxed in the same way as income.

In your case, doing so will trigger the “money purchase annual allowance”, reducing your available pensions annual allowance – the amount that can be paid into your pension and still be eligible for tax relief – for contributions from £60,000 to £10,000.

However, as your wife’s pot is valued at under £10,000, she has the option of taking it as a “small pot lump sum”, meaning it is taxed in the same way but she can retain the full £60,000 annual allowance.