Contracted-in 28 per cent worse off under single-tier – PPI

The average contracted-out 45-year-old will receive £2,288 a year more pension than those who remain contracted-in, giving them income 28 per cent higher, according to the Pensions Policy Institute.

A report from the PPI reveals that a 45-year-old contracted out person on median earnings will receive combined state and contracted-out pension of £199 a week, while the person who remained contracted in will receive £155.

A median earner aged 45 in 2016 who has been contracted-in for their full career will be calculated as having a foundation pension of £132, made up of £88 basic state pension and £44 Serps/S2P. He or she will then accrue further pension up to the single-tier maximum of £155. The equivalent contracted-out worker will also accrue £155 single-tier pension but will keep £44 of contracted-out private pension as well.

The report also says some individuals could build up lower state pension entitlement under the reforms than they would have in the current system. These include individuals who would have built up high S2P entitlements, individuals who may have been eligible for Savings Credit and individuals with less than 7 – 10 qualifying years.

A PPI spokesperson says: “If these individuals are younger and have many years to go to retirement, the contracted-out individual may be able to build up more single-tier pension in the future than the contracted-in individual, and both could end up with full single-tier pensions.”