Additional State Pension

1. Calculating your 'band earnings'

We firstly need to consider the amount of earnings for each tax year (A tax year runs from 6 April one year to the 5 April next year). If you retain your P60 then this will show your total taxable earnings for the year and may even show your 'band earnings'! The earnings used in the calculation of the Additional State Pension are called 'band earnings'. Your 'band earnings' are all earnings between the Lower Earnings Limit (called LEL and currently £77 per week or £4,004 per year) and the Upper Earnings Limit (called UEL and currently £595 per week or £30,940). The Upper Earnings Limit is normally around 7 times the lower limit. A couple of examples should make this clearer. If your gross (i.e. before tax) earnings in the tax year 2002/2003 were £24,004 then your band earnings would be £24,004 - £4,004 = £20,000 per year (The UEL is not important here as the earnings do not exceed the UEL) If your gross earnings in the tax year 2002/2003 were £35,000 then your band earnings would be £30,940 - £4,004 = £26,936 (The UEL replaces the actual level of earnings in this calculation because the actual level of earnings exceeds the UEL). To calculate your Additional State Pension precisely you will need to know your band earnings in each tax year since 1978/1979.

2. Calculating your rate of accrual

This is where we see a difference between SERPS (i.e. for all years of earnings prior to 2002/2003) and S2P. SERPS (years to 2001/2002) All 'band earnings' in years prior to 1988/1989 should be multiplied by 25%. 'Band earnings' from years 1988/1989 to 2001/2002 should be multiplied by a number determined by when you reach State Pension Age (SPA). See table below. Tax year in which State Pension Age reached % of total surplus earnings from 1988/89 1999/2000 25.0% 2000/2001 24.5% 2001/2002 24.0% 2002/2003 23.5% 2003/2004 23.0% 2004/2005 22.5% 2005/2006 22.0% 2006/2007 21.5% 2007/2008 21.0% 2008/2009 20.5% 2009/2010 or later 20.0% The factor between 20% and 25% determines how much pension you will get. The reason for the scale above is that the government reduced the level of the Additional State Pension and like State Pension Ages for women it has introduced it slowly over time. S2P (years from 2002/2003 onwards) The calculation of your S2P pension is a little more complicated than that for SERPS (sorry!). Instead of a rate which you apply to each years earnings (i.e. varying from 25% to 20% for SERPS) the rates are separated into "earnings bands". The bands for tax year 2002/2003 were as follows Earnings band Percentage accrual rates from 6 April 2002 to 5 April 2010 Percentage rate from 6 April 2010 £3,900 to £10,800 Twice relevant SERPS percentage 40% £10,801 to £24,600 Half relevant SERPS percentage 10% £24,601 to £30,420 Same as SERPS percentage 20% Note : This system of rates is set so as to provide a higher level of benefits to the lower paid than SERPS would. So for example if you have earnings of £10,000 per year. Under SERPS you might earn 20% * (£10,000 - £4,004) = £1,199 whereas under S2P the equivalent amount would be 40% * (£10,000 - £4,004) = £2,388. If you earn in excess of the UEL you should be no worse off under S2P. The bands are set each year by the government.

3. Calculating your number of contributing years

The next stage is to calculate the number of years you have been eligible to contribute to the Additional State Pension. To do this we need to calculate the number of years from the later of 1978/1979 and the year in which you were 16; to the year immediately prior to State Pension Age So for somebody born on 5 April 1960. This will be 47 years (i.e. from 1978/1979 to 2025/2026). Each of your earnings figures above should now be divided through by this number.

4. Calculating your Additional State Pension

The final stage in the process of calculating your Additional State Pension is to increase each years earnings figure (after having multiplied by between 20% and 25% (or something else for S2P years) and divided through by the number of contributing years) by the increase in the level of National Average Earnings (NAE) between the year of earnings and the year prior to State Pension Age. This is a complex stage and requires looking up large numbers of figures from published tables. If you are really interested then look it up in "A Guide to State Pensions" published by the Pensions Service. Once this has been done add up all the numbers and this is your Additional State Pension entitlement. Phew! Do you believe me now when I said this was more complicated that the Basic State Pension. However don't worry if you are confused by that little lot, there are a couple of ways to get an estimate of what your Additional State Pension might be.

Approximate calculation of your Additional State Pension

For an approximate calculation of what your Additional State Pension might be do the following. Calculate your number of contributing years (see above) Calculate your 'band earnings' from the latest tax year (again see above). Look on your last P60 from your employer. Calculate how many years you have been paying national insurance Your SERPS pension will be approximately = 20% * current 'band earnings' ÷ 'number of contributing years' * number of years of paying national insurance contributions Your S2P pension can be calculated by applying the current earnings bands to your current earnings and dividing by your number of contributing years. The Additional State Pension can be found by adding these two figures together. An example of the SERPS calculation might help. So lets say you are a woman who earns £25,000 per year (band earnings of £25,000 - £3,900 = £21,100). You have been in employment since you were 16 (number of contributing years 44) and are currently aged 30 (therefore 14 years of paying national insurance contributions) Your currently accrued SERPS pension will be something like = 20% * £21,100 / 44 * 14 = £1,336 per year. A full career (i.e. retirement at 60) would give a pension of something like 20% of band earnings at retirement (assuming band earnings have risen over the individuals career at similar levels to national average earnings) This will give you a very approximate idea of your Additional State Pension. If you want a more accurate estimate then get an estimate from the government.