Most retirees will receive less than the single-tier pension

Only one in five (17%) UK workers closest to retirement will be entitled to a state pension worth exactly the single-tier amount, according to a report by the Institute of Fiscal Studies (IFS).

Its report, A single-tier pension: what does it really mean?, found that 23% of those closest to retirement would be entitled to a state pension worth more than that, while 61% would receive less than the single-tier amount.

The new single-tier pension system, which is expected to be worth around £144 per week, will be introduced from 2016.

According to the report, the main reason that so many people will have a single-tier pension worth less than the full amount is that a large fraction of people have chosen in the past to take advantage of the option to pay lower national insurance contributions in return for not building up entitlement to the second-tier state pension, known as contracting-out.

Among those closest to retirement, low earners are set to experience a larger increase in state pension income on average than higher earners. The report found that the poorest wealth quintile would gain £3.97 per week on average, compared to £2.18 for those in the richest wealth quintile.

The report found that the biggest gainers, on average, are those who have spent long periods out of work or in low-paid work. Women, on average, gain £5.23 per week, compared to £1.62 for men.

The report also found that, among the later cohorts, in particular those born after the mid-1980s, the reforms represent a reduction in state pension income for almost everyone. These reductions will be larger for higher earners.

For example, someone who was born in 1986 who spends 35 years as a low earner would receive nearly £1,000 per year less under the new system than under the current system. This figure could rise to nearly £2,300 per year for a high earner of the same age.

Gemma Tetlow, a programme director at the IFS and one of the authors of the report, said: “This is the latest step in a long, tortuous and rather circular journey for state pension policy in the UK; a journey that started in the early 1970s with a basic state pension equivalent to about £145 a week and which has finally ended up in much the same place.

“In between, we have seen a system of earnings-related state pensions, which were first legislated for in 1975 and which successive governments have spent more than 30 years gradually unpicking as the unsustainable cost of the system became increasingly apparent.

“The major difference between the proposed single-tier pension and the system that was in place in 1974 is that the new system will be considerably more generous to those engaged in unpaid activities or self-employment.”

Soumaya Keynes, a research economist at the IFS and one of the authors of the report, added: “The single-tier pension proposals will boost the state pension entitlements of some of those who are close to the state pension age, particularly those who have spent time caring for children or who had long periods of self-employment.

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“However, for most of those now in their 20s and 30s, although these reforms should make it easier for people to predict how much state pension income they will get, the reforms will also reduce the state pension income that they can expect to get.

“They will need to save more privately for their retirement to make up for this.”