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Middle-income earners to be "hit hardest" in state pension changes, says Punter Southall


State pension reforms have been unveiled, under which women, the self-employed and low earners will have their weekly income increased in a new flat-rate payment worth £144, but according to actuarial consultants Punter Southall middle-income earners will be the "biggest losers" in the pension reforms.

The Government's White Paper, which was published yesterday afternoon shows that there are short-term gainers but longer-term losers from the policy.

Figures in the White Paper showed that around one in five people reaching state pension age after 2017 will be better off, less than one in 10 will be worse off and the others will see no difference. But the proportion who will be worse off will rise rapidly, with more than half of people reaching state pension age after 2060 left worse off. The majority of these will be worse off by more than £2 per week.

However, by 2060, more than half would be worse off than if the current system continued, because they could not build up a state second pension.

After April 2017, people will also have to work longer, making 35 years' worth of National Insurance (NI) contributions, rather than the current 30, to qualify for the full pension.

Punter Southall technical director, Joanne Livingstone said: "The replacement of the two-tier basic state pension and state second pension by one single tier arrangement should lead to a welcome reduction in complexity.

"The Government has described the change as fiscally neutral in the next couple of decades. However this fiscal neutrality has been achieved by paying out less to those who might have expected a full state second pension to the gain of the self-employed and, to some extent, those with career breaks.

"Those losing the biggest proportion of their future pension benefit are not necessarily the highest earners for whom the state pensions are a lower proportion of income but those earning around £35,000 to £40,000 per annum."

Livingstone added: "A 23-year-old who has just started work might, if longevity improvements continue at the forecast rate, have to wait until the age of 73 to be able to claim the pension. Depending on future increases, they could then find that the additional pension over the existing basic state pension is considerably less than the amount they might have achieved if these revisions had not taken place."

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), welcomed the reforms. She said: "Today's announcement for a simpler, more generous state pension is a much-needed shake-up that will ultimately help millions of pensioners and savers. For the first time in a generation, people will know that it pays to save, and that whatever they put aside won't be eroded by means-testing when they retire.

"We welcome the Government's strong commitment to radical change. This blueprint is a key step towards a system that will help people retire with confidence and dignity. The trade-off for working longer must be this better state pension, which will also treat women, the low-paid, and the self-employed more fairly.

"People like their pensions simple. This will set a clearer, fairer state pension that offers an easily-understood foundation on which they can plan their retirement. A flat rate system also dovetails with the recent auto-enrolment reforms by helping workers see what they need to save in their new workplace pension.

Secretary of state for work and pensions, Iain Duncan Smith said: "This reform is good news for women who for too long have been effectively punished by the current system.

"The Single Tier will mean that more women can get a full state pension in their own right, and stop this shameful situation where they are let down by the system when it comes to retirement because they have taken time out to care for their family."

Labour said that the government had 'dithered and delayed' over proposing reforms. Gregg McClymont, the shadow pensions minister, said: "We support sensible pensions reform but this Government has consistently acted with secrecy and incompetence and we will study these plans very closely to ensure ministers are completely straight with the millions of hardworking people who will lose out under these plans."