The state second pension was
introduced in 2003 as a way to help low earners and carers get more from the
state pension. Around 20 million people, the vast majority of whom are private
sector workers, are currently contracted into the scheme. The second state
pension will be abolished as part of the single tier pension, which comes into
effect in 2017.
The TUC research 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 (£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. In time, their retirement incomes will fall too.
The report finds 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 (£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 (£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 ten 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.
A worker earning £10,000, with an
eight per cent total contribution rate to their pension (the statutory earnings
band under automatic enrolment) and retiring in 2030 will have a private
pension income of £3 a week – not enough to offset the £7 a week loss that they
will experience in their state pension income. The same worker retiring in 2040
will receive a private pension income of £7 a week – £11 a week less than what
they would have received under the current state pension system.
The report warns that because it
will take time for auto-enrolment to make a significant contribution to
people’s pension saving, it won’t be until 2032 that private sector workers on
median salaries get more from a combination of their private and state pension
than they would have got under the current arrangements.
It cannot be right that so many
low to middle income earners are going to have to pay in more yet still receive
a lower state pension in return, says the TUC.
The TUC supports the single tier
pension in principle but believes that the initial rate of £144 a week is far
too low.
The scrapping of the state second
pension and low contribution rates under auto-enrolment means that millions of
people on a range of income levels will lose out under the government’s pension
reforms, says the TUC.
Ministers must do more to limit
these losses, otherwise the welcome progress it has made towards delivering a
simpler, fairer state pension could be fatally undermined, says the TUC.
TUC General Secretary Frances
O’Grady said: “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.
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