Winners and losers in shake-up of pensions

The prospects for such a pension ever getting the green light received a boost with the publication of a report from leading pensions think tank the Pensions Policy Institute, which concluded that paying every qualifying citizen a state pension of 7,500 would not cost any more than the current system.

However, the report also highlighted that while nearly seven million will be better off by an average 23 weekly in retirement if such a pension were introduced, more than five million future pensioners will have 18 less weekly to live on in old age.

But for those a decade or so away from retirement, the need for certainty either way is becoming urgent, now the consultation period has drawn to a close ended.

Those planning for retirement need to know when such a scheme could be introduced. The indication is this would be something for the next parliament, making 2016 the earliest implementation date.

Workers who have already accrued large state pensions will want to know how this money will be protected, and how this will impact on their other state pensions.

PPI report author Chris Curry said: "People are anxious to know what the next steps will be. We still don't know for sure that it will happen, or when.

"But with auto-enrolment arriving next year, when all staff are enrolled into a pension scheme unless they opt out, it is important individuals have some certainty about what the state will pay them and what they must provide for themselves on top."

So the PPI report concluding that a level pension of 140 weekly in 2010 money would be "cost neutral" is welcome, and could bring such arrangements a step nearer.

Less comfortable reading is the finding that while many will be better off in retirement, many future retirees will be worse off because of a massive redistribution which will see those with poor work records benefiting at the expense of those who spent their lives clocking on from nine to five.

The proposed pension will be a windfall for those who have not accrued sufficient rights during their working lives to a basic pension topped up by the earnings-linked additional state pension.

However, those with good work records face a double whammy. First, they will be hit by the move from an earnings-linked pension to a flat-rate top-up where everyone receives the same. Second, if they are currently contracted out of the state's top-up scheme, the contracting-out arrangement will end.

This means they and their employers face higher national insurance (NI) contributions.Employers may seek to avoid this additional cost by closing schemes, changing terms or increasing employee contributions. This could impact on the take-home pay and pensions of five million public sector employees and one million in the private workforce.

The government has pledged that any basic or earnings-linked pension accrued will be honoured. But it is not clear how this will work.

So who are likely to be the biggest winners and losers?

THE WINNERS

By 2034, 2.4 million couples will be 28 a week better off (in today's money), with two million single pensioners 11 weekly better off. On average, 6.8 million retirees will be richer by 23 weekly. So who are they?

Low earners

Employees who do not qualify for any or much by way of top-up state pension because they do not earn enough or have a number of low-paid jobs.

Women and carers

Though women and carers can receive credits for periods not at work, these do not currently count towards a top-up, so only qualify for the basic state pension.

The unemployed

Again, this group can receive credits towards a basic pension of around 5,000, but cannot build up an entitlement to the earnings-linked payment.

The self-employed

They currently pay a lower rate of NI because they do not participate in the government's earnings-linked scheme.

They will be rewarded with a higher flat-rate pension in retirement but are likely to see their NI contributions climb as a result.

THE LOSERS

However, the flat-rate pension is by no means a win-win situation for all. Some 1.1 million pensioner couples will lose 24 weekly by 2034, and three million single pensioners will be worse off by 15 weekly, with 5.2 million in all worse off by an average of 18 weekly.

By 2055, the number of single pensioners worse off goes up to 3.4 million, with 0.8 million pensioner couples left 24 a week on the shy side. This is quite a lot of money for a retired couple to lose.

The attraction to the government is that, besides not costing the Exchequer any more, the benefits bill will fall and the amount it receives via NI will rise.

Currently, 60 per cent of pensioners qualify for pension credits, housing benefit or council tax benefit. After the reforms, about a third would qualify for pension credits.So who are the losers?

Higher earners

A new flat-rate pension will not reflect people's rising incomes during their working lives.

Curry adds: "Higher earners and those who would have accrued more than 30 years of additional pension entitlement are likely to receive less income during their retirement from their state pension under the single tier than the other system."

Good workers

If you earn more than about 14,000 but have worked and paid NI all your life, you may end up with a lower pension than now.

Occupational scheme members

In both the private and public sector, those with a contracted-out work-related pension will face higher NI contributions. So will their employers, who may attempt to avoid this bill by closing their schemes, asking them to pay more or reducing benefits.

Less than seven years of contributions

The government believes you must contribute to get a pension, so those who pay NI for less than seven years cannot build any state pension rights.

Those who retire before the reforms bite

We do not yet have a date when such a pension will be introduced, although 2016 is the theoretical springboard. Only those who retire after the launch date will be entitled to the new higher state pension.

Young people in work

They will have to save much more money to fund their retirement.