State Pension  

State pension costs to trigger national insurance hike

State pension costs to trigger national insurance hike

National insurance contributions will need to rise by 5 per cent to sustain the state pension, the government's own analysts have warned.

According to the Government Actuary’s Department (GAD), the national insurance fund – which pays the state pension and other social benefits – will run out of money around 2032.

This analysis also showed that state pension benefits are responsible for over 90 per cent of the expenditure from the fund.

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“Therefore, the long-term finances of the fund will be significantly affected by the level of state pension benefits paid out in future,” the research said.

To maintain the current level of benefits, national insurance contributions would need to rise, the GAD warned.

Another option is for Parliament to approve a Treasury grant, but these would not be sufficient to prevent the fund from running out.

According to Tom Selby, senior analyst at AJ Bell, these Treasury grants would “kick in at £11.6bn a year in 2030 and increase rapidly to £151bn by 2060, and £482bn by 2080, if the system stays as it is”. 

He said: “The options open to policymakers to plug the funding gap are not attractive.”

Former pensions minister baroness Ros Altmann told FTAdviser that this report “highlights again the coming costs of our aging population, as the baby-boomers head for longer retirements”.

She said: “The new state pension system, which will pay less state pension to most people from the 2030s onwards, was supposed to ensure the costs of paying state pensions were sustainable in the long term.

“This new report suggests that after the 2030s, the costs of paying state pensions will exceed the current allowed Treasury spending limit.”

In April 2016 the government changed state pension rules so that eligibility became based on national insurance contributions.

In order to receive the full £155.65 per week individuals would need to have paid national insurance for at least 35 years.

She added: “What is even more concerning is that the cost of the increasing numbers of older citizens is about much more than just the state pension. 

“Private pensions will be less generous in future and the costs of social care have not been factored in anywhere. The state will need to address this care crisis urgently, as paying for care requires much larger sums than a basic pension income.”

According to Steven Cameron, pensions director at Aegon, for many people, “the state pension continues to be a core part of their total income in retirement and something they rely on”.

He said: “While governments may be tempted to focus on the issues they face in the short term, for something like state pensions, they need to think much further ahead.

“Projections such as this from the GAD need careful consideration by the government to make sure state pensions remain affordable not just now but over the long term.”

The poorest pensioners are relying on the state pension for three quarters (78 per cent) of their income, according to research from the Pensions Policy Institute (PPI) published today (10 January).