New State Pension launches but millions of young workers to be worse off

New State Pension launches but millions of young workers to be worse off

As the new State pension launches a think tank warns workers in their 20s and 30s will lose out on up to £19,000.

Reena Sewraz

Investing and pensions

Reena Sewraz
Updated on 6 April 2016

The Government is replacing the complex basic State Pension and State Second Pension with the single-tier new State Pension from today.

Under the reforms, those that reach State Pension age from today (Wednesday 6th April 2016) will be entitled to a flat-rate payment of up to £155.65 a week, so long as they have made 35 years of National Insurance Contributions (NICs).

The overhaul is meant to make the system simpler and fairer but the Pension Policy Institute (PPI) has warned the changes will leave more than 11 million young people thousands of pounds worse off in the long run.

The think tank, in research conducted for the BBC, estimates that three quarters of workers currently in their 20s will lose out on £19,000 over the course of their retirement under the new system.

Meanwhile two thirds of those currently in their 30s are expected to miss out on £17,000 under the reforms.

The big losers of the new State Pension

The reason younger workers will be worse off is because the Second State Pension (also known as Serps), which tops up the basic state pension, is also being abolished.

Under the old two-tier system, the basic State Pension pays up to £119.30, but workers that have built up enough NI contributions could also qualify for the Second State Pension, paid on top of the basic amount.

However, young workers will not qualify for the Second State Pension, even though they will carry on paying their full NICs. Older workers that have already built up their Second State Pension will see these benefits protected.

Chris Curry, PPI Director,  told the BBC: "I think people would be surprised to find out that there was a Second State Pension, so I don't think people are that aware of the top-up.

"And I think people will be even more surprised to find out that what's replacing it is less generous."

Read: The Basic State Pension and new flat-rate State Pension explained.

Others set to lose out

It’s not just young people that are set to lose out.

Age UK has warned that up to 70,000 people in their 50s and 60s are set to miss out on the new State Pension because they don’t have the minimum 10 qualifying years needed to claim.

Under the old system there was no minimum qualifying period to claim the basic State Pension.

Also workers who have ‘contracted out’ of receiving the Second State Pension in exchange for paying NICs at a reduced rate, may be adversely affected as this break will also come to an end. Read: New State Pension will mean bigger tax bill for millions.

Are there any winners?

The PPI analysis shows 4.6 million people in their 20s and 30s will gain an average £10,000 from the reforms in the long term. Low paid women, public sector workers and the self-employed are also set to benefit.

The Government estimates that, over the first 15 years of the new State Pension, three quarters of those reaching State Pension age will get a higher pay out than they would have done under the old system.

This means that more than three million women and three million men will have benefitted from a higher State Pension by 2030.

However, the proportion that are better off gradually starts to decline after this time. By 2050, just half of retirees will get a higher pay-out.

What the Government says

The Department for Work and Pensions (DWP) says in the long run the new State Pension will be less expensive for the taxpayer and young people will benefit from automatic enrolment in workplace pensions.

A spokesperson told the BBC ‘It’s misleading to look at the new State Pension in insolation.’

‘By bringing in automatic enrolment into workplace pensions more young people will have the opportunity to save than ever before.’

Compare stocks & shares ISAs

Most Recent