Under new state pension rules we will all be much worse off

Why did no one notice? The Government hides behind complexity, says Neasa MacErlean

These pensioners are sitting pretty - but the next generation may not have it so good (Getty Images)

The majority of us probably know that a new state pension starts next April – but what few realise is that ''most people would have to live to over 100 to be better off overall'' under the new system.

This is the conclusion of the Institute for Fiscal Studies (IFS) in A Single-Tier Pension: What Does It Really Mean? Contrary to the impression given by the Government, the report suggests that everyone under the age of 30 – and potentially those under 50 – will earn a lower state pension under the new arrangements.

The report says: ''In the longer term, the new system will be less generous to just about everyone than the system it is replacing. This certainly includes anyone born in 1986 or later and potentially includes cohorts born as early as 1966.''

So how has the public been given a more positive view of the system than it warrants? The reason is that there is just one component to the new regime but two in the present one. When comparisons are made between the two, the state second pension (SSP) – the complex but quite generous system that now provides an additional state pension – tends to be left out of the equation.

The gap between the two systems gets bigger for people who work longer. The IFS gives examples of two people who both work for 49 years. One is a high earner who, under the new system, would end up receiving at least £69 less a week (over £3,500 a year); and the other is a low earner who would receive at least £44 a week less (over £2,200 a year).

The effect is considerable. For example, to buy an annuity paying £69 a week and inflation-linked (as the state pension is), a 65-year old would need to pay over £100,000 at today's rates.

The National Audit Office has confirmed to The Independent that it has asked the Department for Work and Pensions to give examples in its literature of cases where people are worse off under the new system. These examples would also include another complicated scenario in which people with SSP entitlement lose their inflation increases on a part of these sums (called the guaranteed minimum pension).

The new pensions minister, Ros Altmann, says the department is "looking at all the communications at the moment".

She told The Independent: "I want to help people understand how the changes will affect those who have entitlements under the old and new systems. But this is an enormously complicated area and we need to make sure we do this as clearly as we can. The past state pension system was hugely complex, which is why it was important and absolutely right to introduce a new system, which will be easier to understand in future."

Although she comes from a consumer background and used to head Saga, Ms Altmann may find it politically difficult to admit some of the charges made by various pension ' experts. Actuary Hymans Robertson, for instance, said when the new scheme was being designed that public-sector workers would be "clear winners" and far better off than those in the private sector who would probably be "substantially worse off".

Various arrangements have been set up that protect the public sector – while in the private sector, employers are likely to reduce the benefits on the schemes they run. This is because of complex changes to national insurance.

In other areas of substantial pension change, plenty of notice has been given so that people can plan. The raising of the female state pension was publicised 15 years before it started. In the current situation, however, there are only eight months to go and the Government has yet to give a full explanation of the effect of the changes

Case study: 'We'll work until 100'

At 25 years of age, with a masters degree and a job in research, Katie can count herself fortunate in many ways. She is also building up a pension through her employer. However, the news that her state pension entitlements could be a third lower than her mother's causes her no real shock.

"People of my age are disillusioned in general," she says. "We say that we'll have to work until we're 100 and we won't have a pension anyway."

Leaving university with a large student loan debt has rather blunted her belief in planning. She and her friends often say they will "never pay off" the student debt.

She is almost indifferent when told that next year's state pension changes could remove £100,000 from her retirement income. "I can't tell you what my contribution is," she says.

"I pay money into the pension scheme but I don't know where that money is. If you talk about £100,000, it sounds like a lot of money. But it is so distant that it is almost like fake money."

Help and advice

Citizens Advice: www.citizensadvice.org.uk/wales/debt-and-money/pensions/types-of-pension/state-pension/

Pensions Advisory Service: www.pensionsadvisoryservice.org.uk and 0300 123 1047