The state second pension was introduced in 2003 as a way to help low earners and carers get more from the state pension. Around 20 million people, the vast majority of whom are private sector workers, are currently contracted into the scheme. The second state pension will be abolished as part of the single tier pension, which comes into effect in 2016.
The TUC report shows that anyone with a long work history will lose out under the single tier pension. While high earners lose most, people on low to middle incomes (£10,000 to £26,000) could also lose significant amounts.
However, the TUC research shows that in some cases even the combined total of the single tier pension and private pension saving will not be enough to match the level of pension received under the current system from the state pension alone.
A worker earning £10,000, with an eight per cent total contribution rate to their pension (the statutory earnings band under automatic enrolment) and retiring in 2030 will have a private pension income of £3 a week - not enough to offset the £7 a week loss that they will experience in their state pension income. The same worker retiring in 2040 will receive a private pension income of £7 a week - £11 a week less than what they would have received under the current state pension system.
The report warns that because it will take time for auto-enrolment to make a significant contribution to people's pension saving, it won't be until 2032 that private sector workers on median salaries get more from a combination of their private and state pension than they would have got under the current arrangements
The TUC has said that it supports the single tier pension in principle but believes that the initial rate of £144 a week is far too low.
The scrapping of the state second pension and low contribution rates under auto-enrolment means that millions of people on a range of income levels will lose out under the government's pension reforms, says the TUC.
Ministers must do more to limit these losses, otherwise the welcome progress it has made towards delivering a simpler, fairer state pension could be fatally undermined, says the TUC.
TUC General Secretary Frances O'Grady said:
"'The state second pension was designed to give low and middle income earners a much-needed top up to the basic state pension. Scrapping it as part of the new single tier pension will mean that many low and middle-income private sector workers, particularly those several decades away from retirement, could be thousands of pounds a year worse off in retirement.
"While the government is right to move towards a simple, single state pension, setting it at just £144 a week is far too low and will mean many future pensioners will be worse off.
"The government should raise the single tier pension rate, and look to raise minimum contribution rates into workplace pensions once auto-enrolment has had time to establish itself, so that fewer people lose out under the government's pension reforms."
David Harrison, managing partner of financial services firm True Potential LLP said:
“I welcome the TUC’s report into the pensions time bomb we are facing as a nation, but it does not go far enough. The average Briton will spend 19 years in retirement with savings that will run out after seven years.
“Tinkering with pensions cannot be the solution to the savings gap because that is part of the problem. It makes little sense to buy something that you cannot access and that is hostage to the government of the day. Forcing people to save into a pension through auto-enrolment won't work either because it treats them like children and will cause more complacency.
“What we really need is a culture of saving which is why we would like to see the Stocks and Shares ISA allowance increased to £25K per annum, per person so that investors’ money could grow in real terms, tax-free, until they retire.”
