Pensions alert for younger workers

CashThe younger generation will be worse off under state pension reforms and should make stronger efforts to save into private retirement pots to make up the cost, a report has warned.

The Institute for Fiscal Studies (IFS) found that women approaching retirement and the self-employed would be the major winners from the introduction of a single-tier state pension from 2016.
But for those born after the mid-1980s, the reforms spelled a less generous state pension income for almost everyone apart from the long-term self-employed, the report found.

The existing two part state pension system will be replaced by a new simplified state pension to be set at at around £146 a week, which researchers said would restore the pension to the same level of generosity relative to average earnings as it was in the early 1970s.
The biggest gainers will tend to be those who have spent long periods out of work or doing low paid work, a group which includes a lot of women, and the long-term self-employed, the report said. Women will typically gain £5.23 per week, compared to £1.62 for men.

Those with more than 10 years in self-employment will gain £7.51 per week on average, compared to £2.19 among those who have never worked for themselves. But for the next generation, the reforms represent a reduction in income, the report found.

It said that someone who was born in 1986, who spends 35 years as a low earner, would receive nearly £1,000 per year less under the proposed new system than under the current system. This figure could be nearly £2,300 per year for a high earner of the same age.

In the longer run, the reduction in generosity will reduce the cost on public finances of an ageing population, which will avoid the need for some other future policy, the IFS said.

Soumaya Keynes, a research economist at the IFS and one of the authors of the report said: "The single-tier pension proposals will boost the state pension entitlements of some of those who are close to state pension age, particularly those who have spent time caring for children or who had long periods of self-employment.

"However, for most of those now in their 20s and 30s, although these reforms should make it easier for people to predict how much state pension income they will get, the reforms will also reduce the state pension income that they can expect to get. They will need to save more privately for their retirement to make up for this."
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