21st August 2013
Millions of workers entitled to the state second pension are set to lose thousands in income due to Government tinkering writes Philip Scott.
The state second pension was introduced a decade ago in a bid to help low earners get more from the state pension and today around 20m people, the vast majority of whom are private sector workers, are currently contracted into the scheme. But the second state pension will be abolished as part of the single tier pension, which comes into effect in 2016.
Research from the Trade Union Congress (TUC) has cautioned that long-term workers could see a loss of up to £2,000 a year.
The TUC study models what the projected retirement incomes of people currently contracted into the second state pension will be under the new single tier pension – which has been set at £144 a week, in 2012/13 terms. The research includes various income bands, pension contribution levels and retirement dates.
The TUC report shows that anyone with a long work history will lose out under the single tier pension. While high earners lose most, people on low to middle incomes, circa £10,000 to £26,000, could also lose significant amounts.
Low earners now in their late 30s will get around £30 a week less than they would get under the current arrangements. Those set to benefit from the single tier pension, such as low earners and carers, will only be at an advantage when the reforms first take place but over time, their retirement incomes will fall too says the research.
The report found that a worker on a median income of £26,000 a year and with a full employment record will lose out as soon as the new single tier pension is introduced. A median earner retiring in 2030 will be £29 per week, or £1,508 per year, worse off.
The losses will increase over time, warns the report, with a median earner retiring in the late 2040s set to be around £40 a week, or £2,080 a year, worse off than they would be under the current state pension arrangements.
According to the report, a low-paid worker earning £10,000 a year can expect to be £5-10 a week better off if they retire soon after the changes take place. However, people earning the same income now and who will to retire in a few decades time are likely to lose out. Someone earning £10,000 now but retiring in the 2040s will be between £18 and £32 a week worse off.
For median earners with 10 years of missing national insurance contributions – for example a woman who has taken a career break to have children – the potential income losses range from £3 to £27 per week, depending on when they retire.
With most workers expected to be auto-enrolled into a workplace pension by 2018, it is expected that private pension saving will plug the gap left by the scrapping of the second state pension.
However, the TUC research shows that in some cases even the combined total of the single tier pension and private pension saving will not be enough to match the level of pension received under the current system from the state pension alone.
TUC general secretary Frances O’Grady says: “The state second pension was designed to give low and middle income earners a much-needed top up to the basic state pension. Scrapping it as part of the new single tier pension will mean that many low and middle-income private sector workers, particularly those several decades away from retirement, could be thousands of pounds a year worse off in retirement.While the government is right to move towards a simple, single state pension, setting it at just £144 a week is far too low and will mean many future pensioners will be worse off.
“The government should raise the single tier pension rate, and look to raise minimum contribution rates into workplace pensions once auto-enrolment has had time to establish itself, so that fewer people lose out under the government’s pension reforms.”