Pension shock looms with returns slashed
Published 19/05/2014 | 09:00
Preparations for the single-tier pension (STP) go into their final phase this month as laws are put into place to create the new flat-rate benefit predicted to be worth about £152 a week in today's money.
But the new system, starting in April 2016, will lead us all into unexplored territory and some potential shocks and surprises. For instance, many people will find that, instead of getting this sum, they will receive about £25 less.
In fact, the Institute for Fiscal Studies (IFS) predicts that 69% of new claimants in the first four years will receive less than the £152 figure.
The IFS calculations – contained in its paper "A single-tier pension: what does it really mean?" – suggest that 40% of people reaching state-pension age between 2016 and 2020 will get under £135. About 60% are on track to get less than £145.50.
"There is a risk that they have been misled into expecting the full amount when that's not the case," said Rowena Crawford, co-author of the IFS report.
The main reasons for a shortfall are that the person has not accumulated the minimum 35 years of National Insurance contributions generally needed to qualify for the full sum or that they have been "contracted out" most of their working life.
"Contracting out" happens when someone has their own, extra pension – either a personal pension or a collective scheme run through their employer. In a large proportion of these cases the person will suffer no immediate disadvantage when their pension income is totted up as a whole.In fact, Laith Khalaf of the Hargreaves Lansdown pensions research team says that people who were contracted out are "among the winners" in the switch to the new system.
Contracting out means they were opted out of contributing to the state second-tier pension, and were given incentives to do so.