Much has been made of the new flat-rate state pension set to be officially implemented from April 2016, with the government heralding the new system as a ëfairer and simplerí model than the two-tier pension format in place at present.
However, recent statistical analysis has compellingly suggested that millions of individuals who are currently employed in the private sector could receive thousands of pounds less each year under the incoming system than the existing model; particularly the lowest earners in the country at present.
Under the pension system at present, retirees enjoy payments from their basic state pension and their second state pension, though evidence has now emerged to suggest that only public sector employees and self-employed individuals will truly benefit from the new flat-rate system, whilst almost all people within the private sector, irrespective of their wealth, could lose out on thousands of pounds over the duration of their retirement.
MGM Advantage conducted a study about the difference in weekly pension payments that someone who earned £5,772 per annum for thirty years would receive from their pension under the existing and incoming system.
Compellingly, MGM found that someone receiving weekly payments from the existing system with national insurance contributions and second state pension provisions included would be entitled to £166.10- £113.10 from the basic state pension and £53 from the second tier payment.
In comparison, someone with the same salary and a 30 year career behind them would receive about £155 a-week from the new flat-rate model, equating to £577 less each year from their pension payments.
Similarly, an individual who received a salary of £30,000 each year would be able to acquire £1,500 more per-annum from the existing two-tier model than the new system
Those who stand to be the most adversely affected will be those who currently receive the largest possible level of S2P payments- people who earn more than £40,040 each year- would be have been able to receive £200 each week from their pension under the current system but a substantial £2,530 less each year from the new two-tier model.
The reality of this issue has been consistently reiterated by business group alike, though the latest figures will be yet another blow to private sectors who are already suffering from the reality that many of their public sector counterparts are on employee pension schemes which ensure their pension prospects are maximised.
Andrew Tully, of MGM Advantage, said: ‘Many people would have got better benefits in S2P than under the new flat-rate scheme.
‘However, the overall position is relatively complex and there are some winners and losers. Self-employed, for example, are likely to be better off under the new system.’
The Department for Work and Pensions (DWP) has highlighted that regulations on S2P payments were modified back in 2012 to make them more beneficial to individuals with smaller salaries, and that a person who has been in employment for the last 30 years would realistically not have been able to acquire the level of pension entitlements by this point.
However, it can be argued that this does not account for the reality that many youth and middle aged employees in this circumstance would have amassed up superior state pensions if regulations had stayed the same and they chose to enter retirement a few years later than originally expected.
The government has attempted to rectify the situation by pledging to compensate those who retire after 2016 and receive less under the new system than they would have otherwise would with S2P in place.
A DWP spokesman said: ‘Our reforms simplify the current state pension system, which is too complicated and leads to misunderstanding and confusion for individuals. Clearly though, with such a major reform, transitional arrangements will be necessary to ensure people are treated fairly.
‘Anyone who has already paid additional contributions towards S2P in years gone by will see this reflected in what they receive – even after 2016 – provided that they have contributed for at least 10 years. This may mean they get more than the full rate of the new State Pension.’
They added: ‘It is worth bearing in mind the flat rate S2P has only been in place since 2012 so this sort of calculation only works for looking at someone’s future career.’
Those who stand to benefit the most from the flat-rate model are the self-employed workers in the UK, who at present have been unable to acquire S2P payments, and those who have not made regular contributions toward their national insurance.
However, Tully identified that while it is true that a multitude of people will miss out higher payments from their pension in years to come, that nonetheless the new system is necessary to simplify and eradicate numerous deficiencies within the two tier model at present.
He said: ‘In the longer-term though it will give a much simpler system which is more likely to be understood ñ rather than the horribly complex second tier provision we currently have.
‘The key is we need some stability in state pension provision. The constant changes we have seen over the last 20 years and more make it very difficult for people to plan with any certainty.’
Get a pension with MoneyExpert.