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Pension reforms 'will leave most people worse off in long-term'

Published 03/11/2016

Pension reforms introduced this year will leave most people worse off in the long-term, according to the public spending watchdog
Pension reforms introduced this year will leave most people worse off in the long-term, according to the public spending watchdog

Pension reforms introduced this year will leave most people worse off in the long-term, according to the public spending watchdog.

The new system, which was introduced in April, does away with pension top ups in favour of a flat rate.

But the reforms mean that in 2060 three quarters of claimants will receive £15 a week less on average, the National Audit Office said.

Groups that lose out from the reforms have not been contacted directly to alert them to the financial hit they will take, its report warned.

Despite hopes that the new system will allow people to plan more for their retirement by giving them certainty about their support from the state, the Department for Work and Pensions has had "limited success" in improving understanding and there is no evidence that it has encouraged extra savings, according to the NAO.

When the changes came in, just 25% of working age people knew how they would be affected and just 18% knew what their state pension was likely to be, it added.

Meg Hillier, who chairs the Public Accounts Committee, said: " The success of the new state pension depends on people being clear about how much they should expect when they stop working, so they can plan properly for their retirement.

"Yet in spite of the department's communication campaign, over half of people who will be pensioners in the next ten years do not know how much their state pension is likely to be.

"Some of these people are going to be surprised to find they do not qualify for the full flat rate."

The new state pension covers men born on or after April 6 1951 and women born on or after April 6 1953. The previous system has been made up of two parts - the basic state pension as well as the additional state pension, which is extra money on top of the basic state pension.

It has a single-tier rate, of £155.65 a week. Usually people will need at least 10 years of qualifying National Insurance (NI) contributions to get any state pension - and 35 years of contributions to get the full amount.

The new system was brought in a year earlier than planned and its introduction was successfully managed by the DWP, the watchdog said.

But it found that it initially took longer to process claims and digital systems have been delayed.

DWP is now expecting to make much smaller operational savings than originally planned down from £341 million to £73 million.

Around 407,000 people are expected to claim the new state pension this financial year and the system cost £89bn last year, according to the NAO.

Amyas Morse, head of the National Audit Office, said: "The department's implementation of the new state pension so far represents value for money. Reforming pensions is, however, a long-term endeavour.

"The department has yet to reintroduce its plans for the digital administration of pensions, and achieving the longer-term objectives of the new state pension will depend on how it interacts with wider reform of the pensions system. Both these key areas will need to be tackled to achieve value for money as the reforms develop."

A DWP spokesman said: "As this report makes clear, we've successfully delivered the new state pension on time and on budget.

We're committed to helping people plan better for retirement which is why we widely communicated changes to the state pension - almost 80% of people have said they were fully aware of any changes ten years before reaching state pension age.

"We've also prioritised digital pension statements to coincide with the implementation of the new state pension and encourage people to start planning early for retirement."

Liberal Democrat pensions spokeswoman Cathy Bakewell said: "We have seem time again that the Government is failing to give people decent information about their retirement, from women who were unaware their pension age had gone up to retirees receiving far less than they anticipated from their pensions.

"The flat rate pension reforms put in place by Liberal Democrat Steve Webb in Coalition have helped simplify the system, but far more work needs to be done to ensure people plan properly for their retirement.

"The Government should start by ensuring that anyone within 10 years of their retirement is given a clear guide to how much they can expect from the State Pension, and are signposted to advice that can help them manage their savings, enabling them to plan for later life."

Paul Green from Saga said: "The new state pension was hailed as both simplifying the system to enable people to plan for their retirement, but also as a better pension upon which people could rely.

"It will come as a shock that the new system appears to be a sleight of hand with future pensioners likely to feel short changed with inferior pensions leaving them worse off. People will increasingly have to trust their own plans for their financial future, rather than rely on the state."

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