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IFS warns of 'nasty surprise' for retirees under state pension reforms

Many retirees will experience the “nasty surprise” of finding that their state pensions under the new reforms are worth less than expected, the Institute for Fiscal Studies (IFS) has warned.

IFS research shows that 61% of people retiring in the next four years will receive less than the £155.65 weekly state pension promised by the government, mainly because eight out of 10 of them have had periods in the past when they ‘contracted out’ state pensions by paying reduced National Insurance rates in exchange for reduced pensions.

The reforms also abolish the ‘state second pension’, meaning that an extra year of work will earn less than under the old system, although this will save the public purse money.

The IFS said: “There is a considerable risk of disillusionment as people start claiming pension incomes this year. Given the rhetoric around the policy, it might come as a nasty surprise to many that their state pension income is in fact less than the full ‘flat rate’ amount of £155.65 per week.

“It would be a shame if such disillusion was to threaten the sustainability of what is on balance a sensible reform. It is also important to be clear that in the longer-term, as well as achieving a genuinely simpler system, the new single-tier pension will be less generous – and therefore less costly to the taxpayer – than the system it replaces.”

The system will also have short-term benefits for groups who are more likely to take time out of employment and accrue less state pension entitlement under the old system, such as women, who will gain on average £5.20 more each week, and the self-employed, who will gain £7.50.

A Which? survey this week found widespread public confusion about the reforms, and the National Audit Office previously criticised the Department of Work and Pensions for failing to provide clear information about the consequences of ending contracting out.



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