Tom McPhail: NI cuts will not reduce pension entitlement

COMMENT Tom McPhail, director of public affairs at consultancy firm The Lang Cat, on state responsibility.
Tom McPhail of The Lang CatTom McPhail of The Lang Cat
Tom McPhail of The Lang Cat

The UK Government has announced two cuts to the rate of National Insurance (NI) in quick succession now. Given that people’s entitlement to the state pension is based on their NI contribution record, what does this mean for their rights?

In 2023, the rate of employee’s NI was 12 per cent on income between £12,576 and £50,268. At the beginning of this year the rate was cut to 10 per cent, and from April it will be cut again to 8 per cent . So, you’d be forgiven for thinking this might mean a cut to your state pension too.

Hide Ad
Hide Ad

Happily, this isn’t the case. There is a link between your NI contributions and your state pension entitlement, but it’s not one that entirely makes sense.

To qualify for a full state pension, you have to pay NI for 35 years, or receive credits – for example, where you receive Child Benefit for a child under 12. However, if you pay NI for less than ten years, you get nothing in the way of state pension.

Similarly, if towards the end of your working life you hit that 35 years’ of contributions and you’ve got the maximum state pension entitlement, your NI contributions don’t go down. No, the government just keeps taking more money off you. There is a “National Insurance fund”, but it’s not like the government is taking your NI contributions and saving them up in a pot with your name on it.

NI contributions you pay today are used to pay out state benefits, such as the state pension, to retired people tomorrow. The cost of your own state pension will be met using money raised by the government from people paying NI or tax in the future.

The Chancellor even suggested he might abolish NI altogether, by merging it with Income Tax. This would not mean the abolition of the state pension, it simply means it would have to be funded out of other sources of taxation. The abolition of NI would probably have to be accompanied by an increase in Income Tax, to ensure there will be no gaps in the government’s budget.

Millions rely on the state pension – both now and into the future – as a major source of retirement income. It would be impossible for the government to abolish or even significantly reduce the state pension, without causing widespread poverty among pensioners.

For now, politicians are bending over backwards to do the opposite, with the Triple Lock guarantee delivering generous increases to the state pension in recent years. All the major political parties are heading into the General Election with a promise to keep the Triple Lock if they are elected to form the next government.

Related topics:



Want to join the conversation? Please or to comment on this article.