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National insurance cuts raise state pension question

The national insurance cuts come as state pensions are due to rise by 8.5% in April

Chancellor Jeremy Hunt’s national insurance (NI) cut, which came into effect last week (6 January) has potential implications for the funding of state pensions, according to Steve Cameron, pension director at life insurance company Aegon.

Cameron said the NI cut offers some welcome relief to the cost of living challenge in the short term.

Speaking to HR magazine, he said: “While positioned as a tax cut, national insurance operates differently from income tax.

“Unlike income tax rates, which are set by devolved governments, the NI change will benefit those across the UK including those in Scotland, many of whom face an income tax hike come April.

“The NI cut also doesn’t affect the generosity of pensions tax relief. Had income tax been cut instead of NI, pensions tax relief would have been reduced accordingly.”

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However, he said there are questions over how state pensions will be funded as they are paid for from NI funds.

“Today’s state pensions are paid from the NI of today’s workers. The cut will mean less NI receipts even though the state pension is increasing by 8.5% in April, more than double the current rate of inflation. 

“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.”

The state pension goes up annually in April in line with the highest of either wage growth, inflation or 2.5%, as measured in September.

Known as the triple-lock commitment, it means that pensioners will receive a 8.5% uplift in their state pension from April 2024.

Cameron added that to control the state pension costs the government could either break the triple-lock or raise the state pension age, both of which are contentious.

He said: “There are two key ways of controlling the costs of the state pension in future. One is to carefully control the amount individuals receive, which is why there is major debate round whether the triple lock, and the generous increases it can generate, is sustainable.

“Another would be to increase the state pension age more quickly than currently planned. The problem with the latter is that many people simply won’t be able to keep working till later ages. It also has a harsher impact on those with lower life expectancies which are often the less well off.”

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