You're £19,000 Poorer Today Because You Can’t Be Bothered to Read About Pension Reform
Don't think of it as something that will only happen in the distant future – these changes are making you poorer now.
Photo via Flickr user altogetherfool
Old people care a lot about pension reform a lot because they want to know whether they'll be spending the next 30 years of their retirement listening to Esther Rantzen give talks on cruises round the Med or scraping together enough pound coins to get a microwavable sausage and gravy meal for one from Iceland. So unsurprisingly, those closest to retirement will benefit most, with 75% of those retiring in the next 15 years seeing their overall weekly pension increase.
Younger people tend to get more riled up about changes that affect them immediately, like removing EMA payments for 16-18 year-olds or refusing to raise the minimum wage for those under 25. But in a roundabout way, these changes to pensions are affecting your wealth now.
So basically this is the situation. From today (5th April), anyone who retires will receive a full state pension will do so at a flat rate worth £155.65 a week, rather than the current £119.30 (although most people won't get the full figure). That might sound like a good deal, but the changes also mean that you'll no longer be able to claim from a second state pension based on your National Insurance contributions (previously known as Serps), though you will still continue to make those contributions.
The full changes are complex but the headline figures means that most people over 40, in particular part-time workers and women, will be better off after the changes. The Pensions Policy Institute has calculated that three quarters of those now in their 20s will lose a notional £19,000 over the course of their retirement. The government's own figures find that men under 25 will be even worse off, receiving £884 a year lower than under existing rules, which translates to a £26,520 loss over a 30-year retirement.
In a statement to the BBC, the Department for Work and Pensions (DWP) said that young people will benefit from automatic enrolment in workplace pensions and "It's misleading to look at the new state pension in isolation" because "by bringing in automatic enrolment into workplace pensions more young people will have the opportunity to save than ever before".
Having more "opportunities" to save does not mean you'll end up receiving more money from the government, and in the long run it seems likely that to exist on a comfortable pension, you'll need to make greater workplace contributions now. In fact, the percentage you contribute, which was previously 0.8% of your salary, is going up to 4% of your salary by 2019. That can be quite painful, particularly if you're on a low income. It has not been explicitly stated by the government that this will make up the shortfall, but that's basically what's happening.
Paying into a workplace pension is a good thing. These contributions are matched by your employer and receive tax relief, and that is basically free money. But month by month you're still getting less take-home pay, and if your workplace pension is, in part, making up the cash lost from your state pension, then you won't feel the full benefit later of the money you're contributing now.
So if you're looking at the big picture, don't think of this as £19,000 lost further down the line, rather as a little more that you're paying out each month. This is the very definition of a stealth tax – something covered in layers of reform and new systems, but essentially leaving most young people worse off.