By Richard Johnstone | 21 August 2013
The majority of people who are currently entitled to receive the state second pension will lose out when the government abolishes the scheme, a report by the Trades Union Congress has warned.
The TUC examined the impact of the government’s plan to merge the two existing provisions – the fixed basic state pension and the contribution-based second state pension – into a single-tier pension worth £144 a week.
Today’s research found that, if people have been contributing to the state second pension for a long time, they would be out of pocket as a result of the changes, which will come into effect in 2016, by as much as £40 a week.
Around 20 million people, the vast majority of whom are private sector workers, are currently contracted into the scheme.
General secretary Frances O'Grady said ‘millions’ could lose out under the reform in the future, and called on ministers to increase the initial rate of £144 a week in response.
‘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.'
The TUC projected the retirement incomes of people currently contracted into the second state pension after the reform is implemented.
It found that, although a low-paid worker earning £10,000 a year could expect to be £5-10 a week better off if they retire soon after the change, people earning the same amount who retire in a few decades would lose out. Someone earning £10,000 now but retiring in the 2040s will be between £18 and £32 a week worse off.
A worker on a median income of £26,000 a year and a full employment record will lose out as soon as the new single-tier pension is introduced, the analysis concluded, and will be £29 per week worse off by 2030. This will also increase over time, with someone retiring in the late 2040s likely to lose around £40 a week compared to the current schemes.
Responding to the report, a Department for Work and Pensions spokeswoman insisted most people retiring by 2040 will be better off over the course of their retirement following the reform.
‘The flat rate will provide a fair base, set above the basic level of means test, helping people to know how much they need to save for the kind of retirement they want,’ she said.
‘With millions not saving enough for retirement and only one in three private sector employees having a pension at all, the government is undertaking the biggest reform to pensions in generations. The reforms have, in less than a year, seen 1.4 million people automatically enrolled into a workplace pension.’
