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Radical reform will hit half of state pensioners by 2060

A radical shake-up of state pensions will leave up to half of pensioners worse off by 2060, it was revealed today.

High earners and recent immigrants will be among those hit by the government's plans to reform the pensions system.

Ministers said their proposals would simplify the current complicated system and particularly benefit women, low earners and the self-employed, with a single flat rate state pension, equivalent to around £144 a week in today's money, introduced for new pensioners from 2017.

But the Government's White Paper revealed that a number of people will lose out.

Under the new system, around one in five people reaching state pension age after 2017 will be better off, less than one in 10 will be worse off and the others will see no difference.

But the proportion who will be worse off will rise rapidly, with more than half of people reaching state pension age after 2060 left worse off. The majority of these will be worse off by more than £2.

The respected Institute for Fiscal Studies (IFS) said the proposals implied a cut in pension entitlements for most people in the long run.

Pensions Minister Steve Webb said high earners will be among those whose pensions will be affected by the changes, adding there were "far more winners."

Anyone recently arrived in this country who isn't able to build up 10 years' worth of National Insurance (NI) contributions before state retirement age will not get a state pension.

Mr Webb said an example of those affected would be "Aussie backpackers" who only work for a few years in this country but are eligible for a pension.

The minister said millions of people needed means-tested top-ups under the current system, adding: "Our simple, single tier pension will provide a decent, solid foundation for new pensioners in an otherwise less certain world, ensuring it pays to save."

Mr Webb said there would be no impact on public sector pension schemes despite union warnings that a hard-fought deal to finalise the Local Government Scheme could be hit.

The Treasury will receive billions of pounds from the extra contributions, described as a "windfall" by unions.

There will be no further increase to the state pension age, which rises to 67 by 2028, but there will be a five-yearly review and 10 years' notice of any further change.

The new single tier pension will be based on NI contributions, with 35 years of payments required to get a full pension.

Around three million women receive a state pension of less than £80 a week because they are penalised to care for or bring up a family or have to rely on their partner's NI record, but the reform will mean that more will get a full state pension in their own right, said the Government.

Around 750,000 women will receive an average of £9 a week extra, while millions of self-employed people will be brought fully into the state pension for the first time.

The IFS said that while the announcement looked like a "welcome simplification", it warned: "While there will be a fairly complex pattern of winners and losers from the reform in the short-term, the main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups, most notably the self-employed."

TUC General Secretary Frances O'Grady said: "We need to simplify a system that few understand, help low-paid women workers - who have never been served by our current system - and the self-employed. But there are real problems about how those ends can be achieved and on what timescale.

"Today's pensioners will be angry that they miss out on this reform and face continued threats to remove the winter fuel allowance and help with travel. The increases in the state pension age redistribute from poorer people with shorter life expectancies to the better-off who live longer."

Karen Jennings, Unison's assistant general secretary said: "These changes are being lauded as a good deal for pensioners, but it is worth remembering that £144 is still well below the poverty line, and more will need to be done to prevent workers finding themselves desperately poor in retirement.

"Who will be worse or better off following these changes will depend on salary growth, which remains stagnant for many workers, including millions in the public sector, and inflation, which continues to eat at the income of low earners.

"What is clear is that the real winner is likely to be the Treasury, who will receive a national insurance boost from pension scheme members and employers."

Unite's assistant general secretary, Gail Cartmail, said: "These proposals could present real dangers to workers in the private sector. The new system will involve higher national insurance for employees currently in contracted-out defined benefit pension schemes, and higher national insurance for their employers as well.

"There is a danger employers will seek to claw back the cost by reducing the quality of their current pension scheme. The end result could mean any gain in state benefits will be wiped out by increased costs to employees in the private sector."

Neil Carberry of the CBI said: "The current state pension is confusing and complex. Big rises in life expectancy and long-term pressure on public finances mean we must get more people saving for old age.

"These reforms will give real clarity and certainty about how much retirement income people will get from the state and how much they need to save privately through auto-enrolment schemes. It is right that the changes will protect state pension entitlements built up before the reforms kick in."

Charles Cotton, of the Chartered institute of Personnel and Development, said: "This is a long-term decision, which has the real potential to bring about a step-change for the better in the retirement income of Britain's employees.

"By creating a simple, easy to understand baseline pension, it will become a lot easier for employers and others to explain and encourage more workers to invest more in pensions savings to boost retirement incomes closer to the levels most would aspire to."

Andrew Vaughan, Chairman of the Association of Consulting Actuaries said: "We have argued for well over a decade that this was needed so people could build their private pension above this with fewer fears that their savings would merely displace entitlements to state benefits.

"Moving the state pension age in line with longevity improvements in a timely way is also welcomed."

Joanne Segars, Chief Executive of the National Association of Pension Funds, said: "Today's announcement for a simpler, more generous state pension is a much-needed shake-up that will ultimately help millions of pensioners and savers. For the first time in a generation, people will know that it pays to save, and that whatever they put aside won't be eroded by means-testing."

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