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Towers Watson: State pension reform ‘unfair’ to contracted-in workers

Consultancy Towers Watson says state pension reforms could see some contracted-out workers earning seven times as much from their contributions as contracted-in workers.

The Pensions Bill is abolishing contracting-out of all pension schemes and introducing a single-tier state pension in April 2016.

Contracted-out workers will see a ‘rebate derived amount’ deducted from their state pension but will be allowed to pay national insurance and build up years to the new level.

Towers Watson, in a submission to the Bill, argues that the pension reforms are unfair.

For each year contracted-out savers pay NI at the full rate, they will expect to get back an extra £214 before tax in every year after they reach pension age. The maximum increase in an employee’s NICs would be £483 this year.

Allowing for 40 per cent tax relief, it would cost about seven times as much to buy a similar retirement income top-up through a private pension.

The submission states: “The treatment of workers who have never been contracted out is not equitable. 

“Such workers will get little or no return in additional state pension from their future NICs, in contrast with their formerly contracted-out contemporaries, many of whom will in effect have pocketed their historical NI rebates without any impact on their ultimate state benefits.”

Syndaxi Chartered Financial Planners managing director Rob Reid: “It does not surprise me people are starting to look at this in more depth because lots of people were shoved back into Serps but have now lost out.”

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