The majority of people currently entitled to the state second pension will receive less when they retire as a result of the scheme being replaced by the new single-tier state pension, according to research by the Trades Union Congress (TUC).
Its analysis modeled what the projected retirement incomes of people currently contracted into the second state pension (with the state pension and a private pension) will be under the new single-tier pension. The state second pension is due to be abolished as part of the single-tier pension, which will come into effect from 2016 and has been set at £144 a week (in 2012/13 terms).
The TUC’s analysis found that:
- With an 8% total contribution rate (on the statutory earnings band), male and female low earners with a salary of less than £10,000 a year, who reach state pension age in 2030 will receive a private pension income of £3 per week (£156 per year), offsetting less than half of lost state pension income of £7 per week (£364 per year).
- For those that reach state pension age in 2040, a private pension income of £7 per week (£364 per year) will partially offset lost state pension income of £18 per week (£936 a year).
- A 12% contribution rate (meaning the individual has to commit a greater portion of their earnings during working age), means low earners that reach state pension age in 2030 will be worse off in retirement under the single tier scheme if they have a private pension, than they would be under the current system with a state pension alone.
- Those reaching state pension age in 2040 are projected to receive a private pension income of £11 per week (£572 per year), which, when added to their single-tier pension, will be £7 per week short of what they could have got from the current state pension system alone.
- It is not until the mid-2040s that median earners on £26,000 a year who reach state pension age will get more from the single-tier scheme plus private pension income, compared to what they could have got from the current state pension (based on an 8% contribution rate).
- With a contribution rate of 12%, the cohort of median earners reaching state pension age in 2032 will receive slightly more from single tier plus private pension income, compared to what they could have got from the current state pension alone.
- The male cohort reaching state pension age in 2049 will be £30 per week better off (£34 for women), despite contributing around 6% of their earnings to their pension, in addition to paying full national insurance contributions for more than 30 years.
Frances O’Grady, TUC general secretary, said: “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 singl- tier pension will mean that many low and middle-income private sector employees, particularly those several decades away from retirement, could be thousands of pounds a year worse off in retirement.”
