In Focus: Tax  

State pension solution may mean NI hit on older workers

State pension solution may mean NI hit on older workers

Pensioners who are still working may face national insurance contributions as part of the solution to the rising cost of servicing the state pension.

According to Steve Webb, former pensions minister and now partner at consultancy LCP, the rate of growth needed for the UK economy, as well as funding ongoing state pension pledges, will mean more drastic tax action.

This could include people working much longer into the traditional 'retirement age' years, as well as levying a NI contribution on working pensioners.

Webb said: "As ever ‘it’s the economy stupid’ – for all of these things, the more we can do to boost our rate of economic growth, the more tax revenue we will have to pay these bills.

"Longer working lives is undoubtedly part of the answer; this doesn’t necessarily mean shorter retirements than people currently have; provided life expectancy goes on rising (pandemics permitting), people can still have a retirement running into decades but starting later."

He said the government might also consider that broadening the tax base of future generations would help spread the load, although it doesn’t generate extra wealth.

For example, Webb said levying NI contributions on working pensioners would mean that some relatively well off pensioners pay more towards all of these bills, such as health and the social care costs of an ageing population, than would otherwise be the case.

It is unlikely such drastic action will be mentioned in the Budget today (Wednesday 3 March) but the government has already taken measures such as raising the state pension age from 65 to 67, and raised the minimum pension age from 55 currently to 57 in 2028.

In September last year, the Treasury confirmed it wanted to see the age 55 pension freedom limit increased by two years from April 6 2028.

Some pensions tax measures are expected in the Budget, such as a predicted freeze on the controversial lifetime allowance limit, which pension specialists have spoken out against, calling it an unnecessary cap on prudent defined contribution savers. 

Webb's comments came after the Office for National Statistics published its three-yearly assessment of the grand total of all the pension promises in the UK.

As reported in FTAdviser in February, the ONS came up with what Webb called an "eye-watering" figure of £8.9tn as at 2018, up from £7.6tn in 2016.

At the time, Webb commented: "The state pension system and the pensions of nurses, teachers and civil servants are based on a set of promises which tomorrow’s taxpayers will have to honour."

However, the affordability of these massive promises depends on the size of the UK economy in the future.

According to Webb, the ONS figures indicate less optimism about the size of the UK economy, which means that the burden of meeting these pension promises is much greater than previously thought.