National insurance tax hike needed to fund state pension

Millions of workers face the prospect of paying higher national insurance contributions to fund the state pension, the Government’s Actuary Department (GAD) has warned. 

The GAD has calculated that a 5 per cent tax hike is required to sustain the state pension, which is being stretched by the UK’s ageing population. 

The state pension is paid out of the National Insurance (NI) fund, which consists of employees’ and their employers’ NI contributions. According to GAD the fund will be exhausted by 2033 under the current NI rates.  

‘If the system is to continue to cover the current form of state pension and other benefits, then either the fund’s income has to rise or expenditure has to be controlled,’ states the report.

-January detox: Five ways to get your portfolio into shape

The report says an increase of ‘around 5 per cent higher than the current rates’ in NI contributions would be required to sustain current levels of state pension payouts. Such a move would be deeply unpopular with younger voters, as they will be picking up the tab for people who have already retired.  

‘Substantial increases in NI contribution rates would both be particularly politically sensitive and would again require primary legislation,’ concludes the GAD review.

Tom Selby, senior analyst at AJ Bell, says the analysis paints a grim picture for the future of the state pension. He adds: ‘The harsh reality is that, as demographics bite and the baby boomers flood towards retirement, the cost of the state pension will inevitably balloon.’ 

Keep up to date with all the latest personal finance news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment