05: State Second Pension

The current three band structure with differing accrual rates for the second state pension (S2P) is:

The Pensions Act 2007 contained three changes to S2P:

• Since 6 April 2009, the upper level of earnings to which S2P applies (the upper accrual point – UAP) has been frozen at £40,040. As a result, by around 2031/32, the low earnings threshold (£13,900 in 2009/10) should be close enough to the frozen upper earnings limit to allow the government to scrap the 10% accrual band and make S2P a completely flat-rate pension benefit. The upper earnings limit (£43, 875 in 2009/10) will continue to increase, probably in line with inflation. As a result, there will be a growing band of earnings (£3,835 in 2009/10) which will be subject to full national insurance contributions but will not accrue any S2P benefit.
• The three bands of accrual will be reduced to two from 2010/11, with the 10% accrual rate applying to both earnings bands above the low earnings threshold (LET, £13,900 in 2009/10). This accelerates what would have happened in a few years in any case because the introduction of the upper accrual point.
• The 40% accrual band will be replaced with a weekly pension accrual amount for each year of S2P membership,  probably from 2012/13. The legislation sets the flat amount at £1.40 a week in 2006/07 terms, index-linked to earnings.