Government plans to introduce a flat-rate state pension from 2016 have criticised by the Trades Union Congress (TUC) for exposing some workers to potentially lower pensions. The claim centres around the abolition of second state pension (S2P).
Flat-rate state pension
The move to a flat-rate state pension, from April 2016, will see the end of the current two-tier system for any future savings – where those who qualify receive basic state pension and additional state pension (S2P or SERPS), which tops this up to its final level.
Basic state pension is currently £110.15 a week – £5,728 per year. From 2016, this will be replaced (for those newly retired) by a flat-rate state pension worth £144 a week (in 2012-13 terms). To qualify for full basic state pension, you currently need to have been credited with 30 years worth of National Insurance contributions.
For the new pension, 35 years of National Insurance contributions will be required.
Additional state pension (S2P)
Additional state pension is paid to those who have made qualifying National Insurance contributions at a rate that reflects their earnings.
The self-employed don’t qualify, and neither do those who are ‘contracted-out’ – because some of their National Insurance contributions went to an employer’s pension scheme, rather than to HMRC. The private scheme’s pension payments are supposed to compensate for the loss of S2P.
Second state pension reforms
From 2016, no further second state pension can be accrued. Contracting out will end and National Insurance contributions will go towards building up single-tier (flat-rate) state pension entitlement.
Additional pension income will be built up in private workplace pension schemes, into which all employees will be auto-enrolled from 2013 to 2017, depending on the size of the company you work for.
Pension reforms criticised
Although many people will benefit from the increase in basic state pension, some will get less overall due to the ending of additional state pension. 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.
Future pensioners will be worse off, says TUC
‘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.’
Pensions after 2016
Although the new pension is flat-rate, after 2016 the amount individual receive will actually vary considerably. Those already receiving state pension will continue to get basic state pension, plus any additional state pension to which they are entitled.
Those who have built up an entitlement to second state pension will receive this in addition to flat-rate state pension. Those who have been ‘contracted out’ will have a reduced entitlement to flat-rate state pension – but can top up the amount they get by making additional contributions. If they pay in enough, they can receive the full £144.