'Vast majority' will be worse off following state pension shake-up

The “vast majority” of people will be worse off under a major shake-up of the state pension, experts warned tonight, as the Government admitted that employees will have to work until they are older before receiving it.

The Institute for Fiscal Studies (IFS) cast doubt on repeated claims by Coalition ministers that stay-at-home mums would be the big winners from their plans to bring in a simplified £144-a-week minimum pension in 2017. It will replace the £107 a week basic state pension, the state second pension for people not in employer or personal schemes and the top-up pension credit for those on low incomes.

According to the IFS, “the main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups, most notably the self-employed.” It said this verdict applied to people born after about 1970. “In the long run, the reform will not increase accrual for part-time workers and women who take time out to care for children. In fact, in common with everyone else, these groups would end up with a lower pension.”

In a White Paper today, the Government revealed that the age at which people can start claiming the state pension will be reviewed and probably increased during each five-year parliament to take account of increased life expectancy. The starting age will already rise to 66 in 2020 and to 67 between 2026 and 2028. Future increases will be fixed by an independent panel. It is likely to decide that today’s younger workers will have to carry on working into their seventies, so the new single tier pension can be afforded by future generations.

Another blow for some women was revealed in an analysis by the House of Commons Library, seen by The Independent. It found that 430,000 women born between April 1952 and April 1953, who will retire before the new scheme takes effect in four years, could be £1,900 a year (£36.55 a week) worse off than a man of the same age. Gregg McClymont, Labour’s spokesman on pensions, said: “Ministers have been caught red-handed hiding the truth on pensions reforms. They have been caught with their hands in pensioners’ pockets. It’s about time this Government had the decency to be honest about who will lose out under its plans.”

Steve Webb, the Minister for Pensions, said the apparent anomaly for this group was due to the different retirement ages for men and women, which will be equalised at 65 in 2018. But he insisted many of the women affected were penalised under the current system for spending “time at home” with their children, a group which would benefit from the shake-up in future.

The Liberal Democrat minister said: “The current state pension is too complicated and leaves millions of people needing means-tested top-ups. We can do better. Our simple, single tier pension will provide a decent, solid foundation for new pensioners in an otherwise uncertain world, ensuring it pays to save.”

But the White Paper said that when the new scheme takes effect in 2017, “the vast majority of people will either see no change in outcome compared to what they would have received had the current system continued, or will have a better outcome”. At least half of all people reaching state pension age before 2050 are likely to have a better outcome [under the new system], of whom the majority will be better off by at least £2 a week.”

Although the reforms are cost neutral, the Treasury will benefit from a £5.9bn windfall because 6.9m workers in final salary schemes will no longer receive discounts on their national insurance contributions (NICs). Mr Webb said that most will eventually get a bigger pension than they would otherwise have done, but admitted about 700,000 will be worse off –mostly higher-earners in the private sector. Labour said this “tax grab” would mean hard-working people would see their NICs rise by 1.4 per cent.

Employers will also face higher NICs, which could cost a firm an extra £1,200 a year for an employee paid £40,000 a year. Raj Mody, head of pensions at PWC, said the higher payments bill would “give employers yet another reason to close the few remaining final salary schemes still open to existing members”.

To receive a full state pension in future, people will have to clock up 35 years of NICs or credits, instead of 30 under the current basic state scheme.

The National Pensioners Convention said the White Paper was “full of holes.” Dot Gibson, its general secretary, said: “People will be asked to pay an extra five years of national insurance contributions, get no more pension and have to wait longer to get their hands on it.”