How to explain the end of the state second pension to employees facing 1.4 per cent drop in take-home salary
Employers are being urged to actively communicate with the six million-plus employees whose take-home pay will decrease from April, when the state earnings-related pension scheme (commonly known as Serps) is finally abolished.
Around five million public sector employees at or approaching state pension age, and 1.5 million in the private sector, will pay higher rates of national insurance equivalent to an additional 1.4 per cent of earnings. Salary costs to employers will increase by 3.4 per cent per affected employee.
The increased tax burden is expected to cost private sector employers £1.2bn this year, while employers in the public sector are being warned that their bill of £2.7bn will further restrict budgets already adversely affected by government spending cuts.
The effect on individuals is equally significant. An employee earning £30,000 will receive £36.80 less after tax per month following the changes; this increases to £53.65 for someone on £40,000 per year. The average drop in pay has been calculated at £37 per month.
There is concern that employees do not understand, and are not anticipating, the changes, which may lead to confusion and anger come pay day. Nathan Long, senior pensions analyst at Hargreaves Lansdown, said: “Employers understand the increased costs they are facing, but how will they deal with their employees? It will be a big communications headache.”
The elimination of Serps, which had its name changed to state second pension in 2002, will officially begin on 6 April. It is set to net the government £5.5bn by 2017, according to Treasury documents published in 2013.
Long said: “The main things employees will want to know are whether the changes will impact on their retirement savings and take-home pay – which is particularly important for people who are reaching retirement age – and how they can get a state pension, which should be around £8,000 a year for most employees.”
The variation will affect male pension scheme members born before 6 April 1951 and women born before 6 April 1953 who chose to ‘contract out’ of the state pension, at points where this was possible, to pay lower national insurance contributions. Those who reach state pension age on or after 6 April 2016 will receive the new flat-rate state pension; contracted-out employees will in future be affected by the increase in national insurance contributions as they reach state pension age. The majority of workers in final salary schemes have chosen to opt out of the earnings-related state second pensions, and instead pay more into their occupational pension.
“Because contracting-out is so widely misunderstood, employers are now facing an uphill battle in terms of communicating what it means to their employees,” said Long.
Jo Thresher, head of money at work at Jelf Employee Benefits, said: “The ending of the state second pension has probably gone largely unnoticed by most employees and employers. Some of those with final salary schemes have carried out education exercises, but the new flat-rate pension hasn’t yet heralded much noise.
“While this flat-rate pension seems sensible and much simpler, it’s not without its complications and drawbacks for older workers, and employers would do well to educate this group to ensure they are on track for the retirement they are expecting.”
Meanwhile, Long urged employers to take the opportunity to undertake more widespread financial education: “As pay will reduce slightly because employees will be paying more NI, those in their mid to late 40s in particular need to start thinking about how much they have in their final salary pension scheme, and how much they’d like to live on when they retire. When changes occur, it’s an opportune time for employers and staff to rethink retirement.”
Story via – http://www.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2016/03/31/employers-face-communications-headache-over-pay-cut-for-six-million-staff.aspx