Pension reform: winners and losers

Updated: 

Iain Duncan SmithDave Thompson/PA Archive/Press Association Images

The Queen's Speech last week confirmed that reform of state pensions is on the cards for this parliament. The speech said changes would 'modernise the pension system' and create 'a fair, simple and sustainable foundation for private saving.'

However, as with anything that claims to be 'fair' there will be winners and losers from the new system - and those who will think the reforms are anything but fair to them.

The reforms

The reforms will essentially usher in a single flat-rate pension. At the moment, your pension depends on how long you have worked and made national insurance contributions for.

It also depends on whether or not you opted out of the state second pension. If you opted out, then you had a sum of cash which was paid into a private pension. Meanwhile, if you stayed put you would build up entitlement to the second pension, which could be worth up to £100 a week on top of your state pension.


Under the new scheme, everyone will receive a flat rate pension worth least £140 a week.

Winners

Iain Duncan Smith told the Telegraph yesterday that the big winners would be women who had taken time away from their career in order to bring up children. At the moment, because they can spend years taking care of their family, they have years away from the national insurance system.

It means they often don't rack up the minimum of 30 years of contributions they need for a full state pension. Duncan Smith said: "It penalises women, just for doing the most important thing in the world, which is to make sure that their families [are cared for]."

Under the new system, those retiring after 2015 will be treated as if they worked throughout their lives. He said they would be on average £2,000 a year better off, and pointed out that. "Caring in itself will carry, for the first time ever, a value, and this will be of major benefit to women. Women will be the biggest single beneficiaries from this programme, massively."

Pensioners on low incomes will also benefit. At the moment those who receive just the basic state pension are existing on £102.15 a week. In some cases this can be topped up through a means-tested pension credit, to £132.60 a week. Under the new system they would receive at least £140. In other cases, pensioners will not apply for the credit - often because they don't see themselves as benefits recipients and don't want the intrusion of means testing. The changes would leave this group significantly better off.

Finally, couples will be winners, because there will be no reduction for being part of a couple. It means everyone receives £140 a week regardless of their marital status.

Losers

The biggest losers will be those on a higher wage who have worked throughout their career. They will have paid a significant sum in national insurance. They are also likely to have paid contributions to the earnings-related state second pension (unless they opted out) which would have meant up to £100 extra a week in retirement. This will be scrapped under the new system.

The Pensions Policy Institute says: "Some who would have accrued high entitlements to S2P or who would have been able to claim savings credit could be worse-off."

Plus, of course, there are those who have already retired or who will retire before the reforms kick in, who will receive pensions under the old system, and could potentially miss out on tens of thousands of pounds over the course of their retirement.

More details are expected to emerge in the next few weeks, which should help clarify whether you will personally emerge from the changes better or worse off.

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