7th October 2013

Scottish Life: Single-Tier Pension winners and losers

The TUC recently published a report with some very useful analysis of who will be better off and who will lose out under STP.

Clearly there are a number of factors that will affect an individual's entitlement but it is possible to identify some key determinants.

Winners

Lower earners. The flat rate nature of STP means that those currently earning less than £14,000 p.a. will benefit from the new rules, particularly if they receive lower than average increases over the course of their employment.

Self-employed and carers who do not currently qualify for full state pension benefits will be able to build up the same level of STP as employees, based on their NI record (which will include credits for carers).

Individuals retiring shortly after 2016 with existing entitlement greater than £144 p.w.. Existing state pension entitlements will be protected including any earnings-related elements.

Those who contracted out using a private pension arrangement, and who have an existing entitlement of less than £144 p.w., will be able to build up STP entitlement without having to offset the value of the rebate-only part of the pension fund.

Losers

Higher earners. The removal of the earnings-related element of the second state pension (S2P) means that individuals currently earning more than £20,000 will receive less under STP than the current system. This affect is increased if they are 'high-flyers' who would expect to receive higher than average increases in salary throughout their career.

Women who have been relying on their husband's state pension benefits to provide for them. From 2016 their entitlement will be based on their own NI contribution records not their husband's. They will also lose entitlement to his pension in the event of his death or their divorce after 2016 (unless one of them reached state pension age prior to April 2016).

Individuals with long service. The TUC charts show that the longer the period of service after 2016 the greater the shortfall against the current system. Even lower earners are likely to receive significantly less if they retire after 2037.

Those who contracted out via a poorly-performing private pension will find their STP entitlement is restricted by a formula which values their contracted out benefits. In practice the actual value could be lower than this amount.

Action points

The overall effect, according to the TUC, "the vast majority of people ... will get less when they retire as a result of... the new single-tier pension".¹ The government is clear that its role in future will be to prevent poverty in retirement, not to provide a replacement income for those earning enough to provide for their own retirement.

This means most people will need to make additional private savings.

• Make sure you are aware of any clients who will either win or lose considerably as a result of the changes.
• Calculate the likely STP benefits which will be paid to the losers under the new rules.
• Add in private savings and compare with the client's projected income needs.
• Identify the potential shortfall in retirement income and calculate the level of savings needed to address it.
• Recommend a suitable savings plan – this is likely to include at least some savings with a pension plan.

Further information

• Read the TUC press release
• Download a copy of the TUC research.

Notes

¹ TUC press release: Many private sector workers will be worse off under state pension reforms 19 August 2013.

Published September 2013
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Pensions