National insurance cuts could mean alternative funding will be needed for the state pension and triple lock, according to some in the industry.
Chancellor Jermey Hunt’s two pence cut to NI came into effect this weekend (January 6) and, according to analysis, will save an individual earning an average salary of £34,963, £447.86 a year.
However, Steven Cameron, pension director at Aegon, has warned the cut could affect future funding of the state pension and people’s financial futures.
The chancellor announced a full commitment to the triple lock in the Autumn Statement with an 8.5 per cent increase in the state pension, almost double the current rate of inflation.
Cameron, said: “Our ageing population, combined with the current triple lock mechanism, means the costs of state pensions are rising sharply.
“Reducing NI contributions - their primary source of funding - adds to the challenge, potentially requiring alternative state pension funding sources from general taxation in future.”
Cameron told FT Adviser that future increases in state pensions and levels of NI contributions raise issues of intergenerational fairness.
He said: “There’s a balance to be struck between protecting our state pensioners while bearing in mind the burden unfunded state pensions place on those of working age.
“We firmly believe this should be a key part of all political parties’ review of the state pension triple lock.”
However, Craig Ritchie, partner at GSB Capital, said it was 'unlikely" that changes to the state pension or the triple lock would be made before the next General Election.
He added: “In 2021, the government suspended the triple lock due to the unusually high level of earnings growth – this potentially set a dangerous precedent that the triple lock is not immune to intervention.
"We will all need to wait to see what changes the next government, whether that be Red or Blue, makes to future state pension enhancements based on the fiscal position it finds itself in."
NI reductions offset by frozen tax bands
While the 2 per cent cut will allow Brits to make a saving, for some employees this reduction will be offset by the frozen tax bands currently in place.
Income tax bands have been frozen until 2028 meaning many people are being pulled into higher tax brackets.
Jamie Clark a pensions specialist at Quilter pointed out that while on the face of it the NI cut looks generous, Quilter analysis showed the average UK worker is just £2.68 a week better off than they would have been had tax thresholds not been frozen.
He said: “A worker on the average salary of £34,963 will take home an extra £8.61 a week due to the NI cut, but due to frozen tax bands and fiscal drag the real benefit is significantly smaller.
“Had frozen income tax bands increased by just 2% over the past four years, someone earning this same average salary would be a further £308.40 better off. If you take this off the headline saving in NI, it leaves a saving of just £139.46 over the year.”
