In all the hype about simplifying the state pension, we weren't told the proposals will lop another 1.4% off civil servants' pay
That nice Mr Webb, the pensions minister, delighted lots of people this week with proposals for a simple, transparent basic state pension of �155 a week. He'll sweep away all that nonsense about pension credits and savings credits, so citizens know exactly what they'll get, and can plan accordingly. What's more, women who have taken career breaks to raise children, and those who suffered unemployment at some time in their life, will get a much better deal in retirement.
What he didn't tell you ? there's not even an oblique reference to it in the Green Paper ? is that if you're a public sector worker, his proposals are likely to result in a pay cut of 1.4%, on top of the pay freezes and cuts already announced.
Now stick with me here ? I'm going to mention a nasty phrase: "contracting out". It's one of those ghastly aspects of personal finance almost no one understands. But at the heart of the proposals for a new simple, and higher, basic state pension, is the end of the state second pension (S2P), and the end of contracting out ? which implies a painful tax rise taken out of your take-home pay if you are a public sector worker. I'll try to explain.
The story starts in 1968 when Barbara Castle launched the "state earnings related pension scheme" (Serps), which promised workers a pension of 25% of pay on retirement, as long as they paid full national insurance.
In 1988, Margaret Thatcher allowed workers to contract out, diverting some of their NI into a personal pension, but, in return, getting a lower level of Serps. Public sector workers also paid less NI, as if they were contracted out, but, peculiarly, they did not, in return, receive a lower entitlement to Serps/S2P. So when contracting out is abolished, public sector workers must be in line to lose their NI discount ? currently 1.4%.
It's a bonanza for the Treasury, as despite calling the proposals "cost neutral", it will rake in an extra �8bn a year from the end of contracting out.
It's not as if that money is being used to pay for a higher basic state pension. The new universal pension will be �155, compared to �102.15 today, which sounds great. It's not. That �155 is in projected 2016 money. In today's money it is �140. And since the current pension credit level is set at �137.35, the real gain is something like �2.65.
Undoubtedly, women who took career breaks are big winners. But when people have to start paying higher NI, and get so little extra in return, they may be less impressed.
Even under the much less generous later version of S2P, some workers could have built up a state entitlement of �200 a week, so under the new system, when S2P is abolished, they will lose �40-�50 a week.
Ah, that's only in the very long term, says the government. Existing entitlements in the old Serps/S2P will, we're told, be honoured. That relies on the NI computer recording all your entitlements correctly. Good luck.
Workers coming into the system in the 1970s will have paid their NI and could have been line for �200 S2P, and at age 65. New workers will get a maximum of �140, and may not qualify until they're 70. I'm all in favour of simplicity and transparency, but this is quite a price to pay.
Source: http://www.guardian.co.uk/money/blog/2011/apr/09/state-pension-reform-nasty-truth
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