The change will affect around five million people working in the public sector who have reached state pension age or are approaching it, along with 1.5 million working within the private sectorEmployers are being called upon to take the lead in communications with employees who have to deal with taking home 1.4 per cent less pay as a result of the final abolishment of the state earnings related pension scheme (SERPS).
The change will affect around five million people working in the public sector who have reached state pension age or are approaching it, along with 1.5 million working within the private sector. From this month, these people must pay higher national insurance rates amounting to an extra 1.4 per cent of their earnings; in addition, employers face a rise of 3.4 per cent in salary costs per affected employee.
Billion-pound burden
Experts predict that this increased tax burden will cost employers in the private sector £1.2bn this year; meanwhile, employers within the public sector are facing an additional bill of £2.7bn at a time when budgets are already being affected and restricted by cuts to government spending.
In real terms, an employee who earns £30,000 a year will take home £36.80 less each month, while an employee earning £40,000 will receive £53.65 a month less. The average pay drop is expected to be £37 a month.
Payday anger predicted
While there are some workers who have already spoken out about the changes, there is also concern among experts that many employees are not expecting these changes and do not understand what is going on. This, it is predicted, could lead to anger and confusion when it comes to payday – and beyond.
Nathan Long, a senior pensions analyst with Hargreaves Lansdown, said that while employers understand their obligations under the changes, dealing with employees could be a major communications headache.
The abolishment of SERPS, which became known as the state second pension, officially began on 6 April. Treasury documents published in 2013 said this would net £5.5bn for the government by 2017.
The changes will affect female pension scheme members who were born before 6 April 1953 and male members who were born before the same date in 1951 who opted to ‘contract out’ of the state pension to receive lower national insurance bills.
People who reach the age of state pension eligibility now will get a flat-rate pension and, in future, contracted-out employees will be affected by the national insurance increase as they reach state pension age.
Most workers who are part of final salary pension schemes have opted to forego the state second pensions option in favour of paying increased amounts into occupational pensions; however, Mr Long said there exists so much misunderstanding about contracting out that employers may struggle to communicate the necessary information to employees.
Jo Thresher, Jelf Employee Benefits’ head of money at work, said the flat-rate pension may seem simpler; however, there are still complications involved for older workers. She added that employers should be educating these people in a bid to ensure that they stay on track for their planned retirement.
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