According to the Pension Minister Steve Webb, high earners will be around £1,000 a year worse off following the Government’s planned state pension reforms.
At the moment, people who made National Insurance Contributions (NIC) throughout their working lives receive a state second pension (S2P), of around £20 a week on top of their state pension, bringing their combined pension to around £160 per week.
However, the Chancellor is planning to introduce a single-tier flat-rate pension, which will see an end to S2P and will mean that everyone receives a flat rate of around £140 a week. The £20 a week difference means that high earners will receive around £1,000 a year less than they would have got under the current system.
Full details have not been revealed yet but will be published in a White Paper, which the Department for Work and Pensions (DWP) says is at “an advanced stage”.
However, Mr Webb has confirmed that it looks as though higher earners will get “less than they would have done” under the system as it stands now once the plans are finalised.
According to Mr Webb, the current state pension system is overly complex and potentially unfair and the Government recognised this is a major barrier to saving, with few people having a clear idea of what their state pension will be worth when they retire.
The new single-tier pension will probably be subject to the “triple guarantee” indexation, which is estimated to increase the real value from the initial £140 per week to £165 per week in 2072, in today’s terms.
While the reforms will hit high earners and those with long careers, the real winners will be those with short careers, especially women who have taken career breaks.
The overall macroeconomic effect will be relatively modest, but should give people a little more certainty for long term planning of savings and incomes.
As an economist at Milsted Langdon, Kevin Butler, is able to share his in-depth research and expert views on a wide range of economic and financial topics.