A new tax year is upon on us, and with it comes the Government’s latest State Pension scheme. The new single-tier – or ‘flat rate’ – system replaces the outgoing basic state pension of £119 a week and the earnings-linked state second pension.
The full State Pension is now £155.65 and, as before, the amount pensioners receive varies according to how long they have been making National Insurance contributions.
According to
gov.uk, the new scheme “provides a firm foundation for workplace saving”.
But there has been considerable controversy over the overhaul, for example from the charity AgeUK, which calculated that 70,000 retirees will be worse off under the flat rate system.
£155.65
The full weekly entitlement under the new State PensionRisk of disillusionment Emma Rumney in her report for
PublicFinance launches straight into details of a probing report carried out by the Institute for Fiscal Studies (IFS). “The simplicity of the new system has been at best misunderstood and at worst overstated,” she quotes from the report.
The Government has so far espoused that if a person makes National Insurance contributions for at least 35 years, they will receive the full weekly entitlement. But, Rumney goes on to say that this does not take into account the transition period before the full switchover to the new system – “a period when continued complexity is ‘unavoidable’”, Rumney says, again quoting the IFS.
Rumney highlights some key statistics from the IFS report: “Only 17% of those reaching the State Pension age over the next four years will receive [one] worth exactly the full single-tier amount. Around 23% will enjoy a higher income but the majority, 61%, will receive less.”
Though calling the reform, on balance, “sensible”, the IFS warned of a “considerable risk of disillusionment as people start claiming pension incomes this year”.
Public Finance report
What a difference a day makesIn her report for
Professional Adviser, Carmen Reichman prefers to focus on the ‘big winners’ from the pension reform – the self-employed.
Reichman says that, under the old system, self-employed workers were exempt from the state second pension, which was related to additional earnings. This meant they lost out on £36.35 per week.
Under the new rules, the self-employed will be “better off … because they will have access to the same £155.65 a week pension entitlement as others.”
Reichman goes on to share the views of Steven Cameron, Aegon UK’s Pension Director: “For those self-employed individuals who reach state pension age from today, it's a case of ‘What a difference a day makes'.”
But toning down his enthusiasm, Cameron added: “While this may come as a very pleasant surprise to the growing number of self-employed who reach state pension age in future, even at the higher level it is unlikely to provide a comfortable lifestyle in retirement.”
Professional Adviser article
Generation gapWhile some focus on the winners from the pensions shake up,
The Telegraph turns its attention to the losers.
In her report, Olivia Rudgard points to the Pensions Policy Institute’s findings that, under the new scheme, people in their 20s will lose out on £19,000 each in retirement on average, and people in their 30s around £17,000.
£21,000
The amount men in their 20s could lose out on over their retirementYoung men, says Rudgard, are likely to fare worse than young women. They will miss out on an average of £21,000 over their retirement, while women will be £18,000 worse off. Rudgard explains that this is due to the abolition of the earnings-linked pension, which benefited men because, on average, they earn more.
Rudgard goes on to quote Chancellor George Osborne: “The new system means that at last, people will have certainty in what they can expect from the state in old age.”
Agreeing with the Chancellor, Chris Curry, a Director at the Pensions Policy Institute, said: “While the majority of millennials will see a notional loss of state pension income as a result of … the new State Pension, they will benefit from greater clarity about what that income will be.” A mixed blessing, one might conclude.
The Telegraph comment
In light of changes to the pension scheme and other savings mechanisms, do young people need to re-evaluate their financial priorities? Look out for our CISI TV Young Money debate, which will be online shortly.
Seen a blog, news story or discussion online that you think might interest CISI members? Email joanna.lewin@wardour.co.uk