In April 1975 the State Earning Related Pension Scheme (SERPS) was introduced to replace the Graduated Pension Scheme. SERPS was an additional benefit that accumulated alongside your basic state pension in a bit to raise the standard of living for many individuals in their retirement. The benefit is dependent on contributions made to the scheme via your National Insurance Contributions (NIC).
The benefit that accumulated under SERPS was calculated at 1.25% of middle band earnings. Middle band earnings where revalued each year and adjusted in line the national average earnings for each year of your working life up to 20 years. It could be based on the best 20 years of your working life. Therefore up to 5th April 1999 the maximum benefit would be 25% (1.25% x 20 best years). Owing to changes in the Social Security Act 1986 you are no longer able to base the benefit on the best 20 years but instead it is taken over an average of your lifetime revalued earnings.
Benefits accrue under this scheme for the employed only. Self employed would not benefit due to the different class of National Insurance that is paid on their profits. The government chose to give individuals more control of their pension funds by allowing them to opt out of the State Earnings Related Pension Scheme in favour of investment into an Appropriate Personal Pension. The funds that accumulated in the Appropriate Personal Pension resulted from a rebate from HMRC each year. These funds would have been segregated from your personal pension as they used to be treated differently when crystallising the benefits at retirement. From April 2012 you are no longer able to contract out of SERPS. All of those individuals who were contracted out with now be automatically returned to the state system. This means that no further contributions will be paid by HMRC and therefore national insurance contributions for both employer and employee will return to the standard level.