NI and Pensions

[ayshfm1]

[

Prove that!
It's not my argument and I don't feel like helping you do so.

However most workers will, with contributions from their employers, have paid 20% of salary for their entire working life.
In 2022 the median salary was about £30k. Assuming that someone starts work in 22 at the age of 20 and works until 67 that's 47 * £6k.
That's over £1/4 mill. No small sum.

NI is not 20%, that is general taxation and that pays for defence, education, etc. NI is just 12% now (and it was also supposed to fund unemployment benefit originally). Not to mention last time I checked the annuity value of a UK state pension it was approaching 400K and there is nothing in the market that matches the triple lock and that kind of certainty commands a considerable premium.

400K > 256K and the 256K was a mendacious number to start with.

[Urbandreamer]

[

Prove that!
It's not my argument and I don't feel like helping you do so.

However most workers will, with contributions from their employers, have paid 20% of salary for their entire working life.
In 2022 the median salary was about £30k. Assuming that someone starts work in 22 at the age of 20 and works until 67 that's 47 * £6k.
That's over £1/4 mill. No small sum.

NI is not 20%, that is general taxation and that pays for defence, education, etc. NI is just 12% now (and it was also supposed to fund unemployment benefit originally). Not to mention last time I checked the annuity value of a UK state pension it was approaching 400K and there is nothing in the market that matches the triple lock and that kind of certainty commands a considerable premium.

400K > 256K and the 256K was a mendacious number to start with.

You really don't know the facts do you.
https://www.gov.uk/national-insurance-rates-letters
Employee 10%
Employer 13.8%

10 + 13.8 = 23.8%

Ok, so lets do the sums using REAL rather than "mendacious" numbers.
Employee £1742pa
Employer £2404.51
Total £4146.51pa
over 47 years with no growth
It would be £194,886

Note that I have taken into account the fact that NI is not charged until you earn more than a certain amount. The numbers are REAL.

As for the Annuety rate, try a final value calculation on £4kpa at a rate of 4%. That provides a meaningful view of what the returns on that "tax" would be.
https://www.calculator.net/future-value ... #calresult

OH DEAR, it's now over £1/2mill which using back of the envelope calculations is more than £400k.

As for "nothing in the market" matching the promises made by the government, isn't your entire point that government promises can and should have no value? Didn't you make some point about contributions not entitling people?

[Charlottesquare]

In my opinion, you seem to be living in a world different to mine. The state pension is funded by taxes - howsoever raised. It is a simply incorrect idea that hypothecation is an actual thing when money ends up in the governments coffers.

Just because that might have been how it was intended to be in a bygone age doesn't make it the case now.

There is no reason in my mind why the state pension shouldn't be taxed as it ultimately forms part of the income of those eligible to take it.

But the state pension is taxed,that is, it makes up an equal component in one's taxable income. The fact that a full state pension is currently similar to the tax free allowance (which applies to pensioners and non-pensioners alike) is pure coincidence. I'm sure it couldn't be very long ago when the old state pension was higher than the single person's allowance.

All governments like to pretend that taxes are not hypothecated in the UK, but the state pension age has been increased in recent years to ensure that payments don't veer to far off of the amounts of money contributed to pay for it. Indeed the whole recalculation of years needed, increased charges to working women, increased payments under the new flat rate state pension, and increased normal retirement age, was AIUI done on the basis that the overall costs would remain roughly constant, and thus in line with maintaining a relatively even National Insurance contribution rate.

The state pension can readily be ahead of the personal allowance, if one had decent graduated pension components etc. I still do a return for a friend where his state pension was £13,568 re 2022/2023

[MuddyBoots]

However most workers will, with contributions from their employers, have paid 20% of salary for their entire working life.
In 2022 the median salary was about £30k. Assuming that someone starts work in 22 at the age of 20 and works until 67 that's 47 * £6k.
That's over £1/4 mill. No small sum.

Of course I have assumed no investment growth, because our brilliant lords and masters don't invest that "tax". Other countries do and don't consider it a tax.

Another quick calculation is to compare how much the government receives in NI compared with how much the state pension costs in total.

In 22/23 NICs brought in £176 bn and state pensions cost c. £112.5 bn so if the NI system is only intended to cover our state pension it is easily managing that. However, if we want it to also cover unemployment benefits such as universal credit then we need to factor in another £73 bn and it needs extra funding from elsewhere in the tax system.

I think could be a good idea to ringfence NI for the benefits & pensions systems as it would give the public a better understanding of how much it costs and where their tax money is going. Even splitting up NI into two components for pensions and unemployment insurance might be worth considering, so that workers could be given a choice of opting out in favour of private insurance. I'd even consider the same principle for other state services which can be provided privately like health and education. Come to think of it, why not let people opt out of the state pension too if there's a compulsory requirement for a private alternative?

https://www.statista.com/statistics/284 ... ributions/
https://www.statista.com/statistics/283 ... penditure/
https://obr.uk/forecasts-in-depth/tax-b ... al-credit/

[kempiejon]

The state pension can readily be ahead of the personal allowance, if one had decent graduated pension components etc. I still do a return for a friend where his state pension was £13,568 re 2022/2023

I would have thought this unlikely, in fact commented the same up thread. I've been thinking about it a bit more and the earnings part of pensions, as you say the graduated component can push the amount up. Also I know a fella who deferred his SP for quite a few years in the days when it was worth 10% or so and I'd expect his SP exceed the basic allowance now. Seems barmy that the benefit exceeds the tax free allowance but I know the benefit cap is a few £k over £12570.

I see there is a handy list of which benefits are taxed, including State Pension, JSA, carers allowance and a few more.
https://www.gov.uk/income-tax/taxfree-a ... nce%20(ESA)

I am rather delighted though that Winter Fuel Payments and Christmas Bonus are protected from those grabbing hands. Lord Sugar will be cross.

[ayshfm1]

One assumes your argument is attempting to make the point that the state pension is sustainable, thus you dispute my view that it will be forced to change and go to great lengths to show how much money is being paid that would in fact finance it.

So I think it's perfectly reasonable for the purposes of this debate to point out that to all intents and purposes given the industry being unwilling to make a comparable product that it is effectively priceless and thus your argument fails right there and then. It doesn't matter what number you manage to produce on the other side.

In a projected growth versus certainty equation certainty wins out especially given the underwriter, in other words the value of the state pension is enormous and thus there is no way most people will ever have paid enough money into the scheme to pay for it.

For projections I usually cancel growth and inflation off. It's conservative I admit, but given this is someone's pension then we can't really encourage even a S&P500 level of risk in order to beat inflation. So if we take the nominal 200K value and look at what it would buy as annuity today. At 67 in good health you'd get about 9.5K for the rest of your life, but there is no indexing. Versus a state pension of 10K with the priceless triple lock.

No contest.

[Charlottesquare]

The state pension can readily be ahead of the personal allowance, if one had decent graduated pension components etc. I still do a return for a friend where his state pension was £13,568 re 2022/2023

I would have thought this unlikely, in fact commented the same up thread. I've been thinking about it a bit more and the earnings part of pensions, as you say the graduated component can push the amount up. Also I know a fella who deferred his SP for quite a few years in the days when it was worth 10% or so and I'd expect his SP exceed the basic allowance now. Seems barmy that the benefit exceeds the tax free allowance but I know the benefit cap is a few £k over £12570.

I see there is a handy list of which benefits are taxed, including State Pension, JSA, carers allowance and a few more.
https://www.gov.uk/income-tax/taxfree-a ... nce%20(ESA)

I am rather delighted though that Winter Fuel Payments and Christmas Bonus are protected from those grabbing hands. Lord Sugar will be cross.

It was never common but not totally uncommon. Tended to be former private company directors who got high salaries but of course that went out of fashion when dividends rose to the fore. When in practice I had a few of these with HMRC generally issuing K codes against other pension entitlements to capture the tax due.

[CliffEdge]

Well this thread has convinced me that Labour cannot be worse than that Hunt.

[Urbandreamer]

One assumes your argument is attempting to make the point that the state pension is sustainable, thus you dispute my view that it will be forced to change and go to great lengths to show how much money is being paid that would in fact finance it.

So I think it's perfectly reasonable for the purposes of this debate to point out that to all intents and purposes given the industry being unwilling to make a comparable product that it is effectively priceless and thus your argument fails right there and then. It doesn't matter what number you manage to produce on the other side.

In a projected growth versus certainty equation certainty wins out especially given the underwriter, in other words the value of the state pension is enormous and thus there is no way most people will ever have paid enough money into the scheme to pay for it.

For projections I usually cancel growth and inflation off. It's conservative I admit, but given this is someone's pension then we can't really encourage even a S&P500 level of risk in order to beat inflation. So if we take the nominal 200K value and look at what it would buy as annuity today. At 67 in good health you'd get about 9.5K for the rest of your life, but there is no indexing. Versus a state pension of 10K with the priceless triple lock.

No contest.

You might start off by suggesting who's argument you are assuming. If mine, then the assumption is wrong. I certainly am not making the argument that you claim.
My argument is simple. The state has made commitments to it's citizens and taken money to pay for those commitments. They need to deliver upon those commitments.

I've gone further and pointed out that the costs are NOT as low as assumed. Indeed I suspect that simplifying the system to allocate the costs of NI into standard income tax would lead to a revolt. Standard rate tax payers today are paying rates in excess of 40%, hidden by smoke and mirrors. Where did you intend to find the money paid by the employers?

As for the industry being unwilling to sell a similar commitment, well that might indicate that unlike some, they can do the sums.

FWIW, it might be worth looking at just how big commitments can be if you don't actually do the sums.
How long do state pensions actually have to be paid? Well Irene Tripplet died in 2020. The last recipient of a pension from the 1861 US civil war.
(She was less than 100 by the way). Those pensions cost the US government (and tax payer) rather a lot.

Re private provision (as per a previous poster). I certainly do question if the current system is sustainable. It's not even the system many (i.e many women) joined. I'd recommend a fair amount of distrust. Don't expect the state to treat you fairly. Or for that matter the reformers.

[gryffron]

Well this thread has convinced me that Labour cannot be worse than that Hunt.

Oh, they can be much worse. Wait and see.

Gryff

[Arborbridge]

Well this thread has convinced me that Labour cannot be worse than that Hunt.

Oh, they can be much worse. Wait and see.

Gryff

Or they could be better.....

[ayshfm1]

Well Urban. So you don't disagree with me. You just think Governments ought to honour their commitments, well it would be nice!

I don't think anyone suggested the employers were going to get an NI pass. Where are the votes in that? Since the employee doesn't even see that money there is no perception that this money is buying any sort of entitlement. Moreover it's nonsensical to believe that abolishing NI changes the requirement to raise revenue, however NI is levied on employment and thus if the amount it raises was distributed across other tax classes then tax that most would have deducted from their pay packet would be lower.

As for the dig at my math, I didn't really start out taking the time to work the numbers out in any detail, but in much the same way I don't need to know how much bigger a mouse is compared to an Elephant to know the Elephant is the larger, the math gulf between what people pay in to get the state pension and what it is worth is of a similar scale. A fact I think you are well aware of despite taking the counter view.

I am also not the one that extrapolated a 47 years worth of assumed and unknown growth (which may well not happen) and compared it to an absolute sum today and trumpeted it was larger, without any mention that the number being compared was derived from trying to value an entity that has some very special characteristics which would mean that over the next 47 years it would quite different. This why I simply reduced it to something that produced a reasonable comparison today, which massively under values the guarantee's it currently provided.

People have made a reasonable point, receipts from NI could finance pensions currently, this is not the problem, with the number of workers set to reduce compared to the number of pensioners projected to rise steeply then there will come a point in the not to distant future where not only does it not, but it does not by a very wide margin, unless steps are taken to address it, which is why we all might want Governments to honour their commitment there little prospect of that being viable (and in their defence the system was created when people retired and died a couple of years later. It could argued that all these age increases are trying to return to that point.)

[Lootman]

Very few will have paid enough in real terms to have purchased the benefits it provides, it also means that it's hard to just dish out a pension to those the Government deems "need" as they often won't have qualifying NI payments.

most workers will, with contributions from their employers, have paid 20% of salary for their entire working life.
In 2022 the median salary was about £30k. Assuming that someone starts work in 22 at the age of 20 and works until 67 that's 47 * £6k.
That's over £1/4 mill. No small sum.

One could argue that it is a folly to work extra years once you have qualified for a full pension. And especially since you can buy back any "missed" years worth of contributions at a bargain rate.

I earned 18 years worth of stamps, maxxed out buying back years, and from next week will be getting close to a grand a month in SP. That is a decent deal. If I had worked 47 years, not so much.

But isn't the real problem those who still get a SP or equivalent without contributing at all?

[UncleEbenezer]

I know NI was supposed to be a way to link funding certain things to the tax paid to fund them. However this has long been an inconvenience that Governments of all colours deprecated. As of now it is just another tax, and when looked at in that context it's not a fair one.

Was it ever "supposed to be"? Or was that just a government-of-the-day's excuse for introducing a huge "stealth tax" in an era of less cynicism about them than today?

The link to benefits is nonsensical, and has been throughout my working life (i.e. since 1983 - holiday jobs aside). Both pensions and out-of-work benefits get topped up by means-tested benefits to a level that has never been lower than NI-based rates, and is often higher. Indeed, before Universal Credit[1], it was often better NOT to be eligible for NI-based benefits, as it meant you could qualify for other benefits tied to means-tested income support.

In 2006 I wrote advocating the gradual abolition of both parts of NI, and that any revenue shortfall should be made up by taxing Bad Things - like polluters and hoarders of land. I still hold that position, despite reaching a time of life where I no longer suffer from NI myself. The Jobs Tax is surely the worst of all taxes, made all the more dishonest by spurious links to pensions and other benefits!

[1] I have no knowledge of whether that particular anomaly still exists for some.

[NeilW]

Moreover it's nonsensical to believe that abolishing NI changes the requirement to raise revenue,

Government never needs to raise revenue. That is an obsolete concept. If the state pension is paid, and there are items to purchase with that pension, then that will cause VAT to arise that wouldn't have happened otherwise. The rest is then paid to staff etc, which attracts income tax, etc, and so on down the spending chain - like a stone bouncing across a pond.

Calculate that simple geometric series out and you'll find that paying the money causes *additional* tax to arise that matches it. Because that's how percentages work.

We pay for it by spending the money. That's what an independent currency they don't use anywhere else implies.

People have made a reasonable point, receipts from NI could finance pensions currently,

Receipts from NI end up shredded in the same accounting shredding activity as any other centrally collected tax. They are deleted from the accounts at the end of the day. NI takes a slightly more circuitous route, but is essentially dematerialised into a notional claim over the National Loans Fund with recourse to the Consolidated Fund like everything else subject to the Exchequer Sweep.

The State pension is paid every morning at 8:30am simply by HM Treasury ordering the Bank of England to account for it. The pensioner's bank account is then credited as a result of the cascade of bank accounting that sets off.

The receipt and spending arms never meet. They are entirely independent processes with separate operating procedures. To the extent that the Government Banking Service runs receipts via Barclays and spending via NatWest.

Financing is never a problem. It just happens as a function of the way the money system works. A bunch of accounting journals are then pointlessly applied to make it look like there is a notional fund paying something. It isn't. It's an accounting abstraction with no control function whatsoever.

The fundamental issue is whether there will be anything to buy with a pension once you draw it. And that depends not upon taxation rates but upon the level of physical investment this country is prepared to undertake in the meantime. From our current pathetic level of 18% of GDP it's likely the shelves will be empty and there won't be anything to buy.

It's the investment/consumption ratio we need to be concerned with if any of us wants to retire on a pension (public or private), not tax rates.

NeilW

[Urbandreamer]

I know NI was supposed to be a way to link funding certain things to the tax paid to fund them. However this has long been an inconvenience that Governments of all colours deprecated. As of now it is just another tax, and when looked at in that context it's not a fair one.

Was it ever "supposed to be"? Or was that just a government-of-the-day's excuse for introducing a huge "stealth tax" in an era of less cynicism about them than today?

A simple web search will show historical facts.
Before and at the start of National Insurance, most provision was private.
Private sick pay (paid by Unions or friendly societies).
Private unemployment benefit (dito).
Private Doctors. (NI paid for the NHS).
Private Pensions (friendly societies)

NI was introduced in 1911 and obviously had to start as a pay as you go system. It was however intended to be a fully funded scheme.
https://en.wikipedia.org/wiki/National_ ... e_Act_1911

It is revisionist to claim that what we have today is what was originally intended or indeed promised. The citizens have been repeatedly betrayed.

[spasmodicus]

Was it ever "supposed to be"? Or was that just a government-of-the-day's excuse for introducing a huge "stealth tax" in an era of less cynicism about them than today?

A simple web search will show historical facts.
Before and at the start of National Insurance, most provision was private.
Private sick pay (paid by Unions or friendly societies).
Private unemployment benefit (dito).
Private Doctors. (NI paid for the NHS).
Private Pensions (friendly societies)

NI was introduced in 1911 and obviously had to start as a pay as you go system. It was however intended to be a fully funded scheme.
https://en.wikipedia.org/wiki/National_ ... e_Act_1911

It is revisionist to claim that what we have today is what was originally intended or indeed promised. The citizens have been repeatedly betrayed.

Ah, but if you are expecting to be betrayed (which might be the state of mind of most posters on this thread) is what inevitably follows, as with UK state pensions actually a betrayal or merely the result of a life process so complex that it defies rational computation? When I retired, I had a complicated employment history and as a result, a disjointed NI contribution history. Over various periods, I had been a student, was self employed, sometimes paid voluntary NI contributions, worked in the UK, worked abroad, took time out for a higher degree, started a company, paid some SERPS contributions, deferred taking my pension etc. When I finally decided to take it, I had absolutely no idea how much I would receive. The pension service sent me a statement, of labyrinthine complexity and inscrutable bureaucratic terminology running to 2 pages of A4, with a number on the bottom line that seemed reasonable, so I thought to myself - that's OK! Whether it was "correct" or "fair" or even a "betrayal" is entirely beside the point.

So it is with life. Pensions ultimately seek to make an unpredictable world appear safe and secure and, in a socialist perspective, "fair". An impossible dream. The dinosaur's pension fund contract probably didn't have a clause in it that said contributors would get their money back in the event of an asteroid impact.

S
PS I saved up various private funds too, as a backup

[UncleEbenezer]

Was it ever "supposed to be"? Or was that just a government-of-the-day's excuse for introducing a huge "stealth tax" in an era of less cynicism about them than today?

A simple web search will show historical facts.
Before and at the start of National Insurance, most provision was private.
Private sick pay (paid by Unions or friendly societies).
Private unemployment benefit (dito).
Private Doctors. (NI paid for the NHS).
Private Pensions (friendly societies)

Indeed, the state taking on all those things (a real ambition that has been partially accomplished) was going to require much higher taxes - hence the "stealth" move of calling it something different and pretending it benefited the payer. And then the complexity and horrendous unfairness of the rules as implemented - jobs for the bureaucrats.

NI was introduced in 1911 and obviously had to start as a pay as you go system. It was however intended to be a fully funded scheme.
https://en.wikipedia.org/wiki/National_ ... e_Act_1911

Intended as? Or sold as?

[Neutrino]

Many pensioners have good incomes because they have personal pensions and/or defined benefit pensions in addition to their state pension.

I think that the government would like pensioners to pay the same NI as people in work. The problem is that there would be howls of protest from individuals that would be subject to NI twice on the same income, both on personal contributions to their pension and on the income from the pension.

A sceptic might think that the government is getting around this problem by reducing and eventually scrapping employee NI while increasing taxes by freezing income tax allowances and reducing capital gains tax allowances.

[Urbandreamer]

NI was introduced in 1911 and obviously had to start as a pay as you go system. It was however intended to be a fully funded scheme.
https://en.wikipedia.org/wiki/National_ ... e_Act_1911

Intended as? Or sold as?

Partially functioned as, after a brief time. Had you followed the link you would have found that there were examples of that. Try a bit of research and provide some evidence for your claim.

Since you couldn't be BOTHERED to follow the link, here is an extract.

A key assumption of the Act was an unemployment rate of 4.6%. At the time the Act was passed, unemployment was at 3% and the fund was expected to quickly build a surplus.

The basic concept of ANY insurance is that the premiums are more than the payments. Some of those involved in the early days of NI were "for profit" organizations. Their premiums were set higher than the expected payments. Apparently some of them contributed more to the payment fund than they received. Possible if profits can be made upon the capital.

This entire thread is predicated upon the facts that NI premiums are not sufficient to cover the payments and that there is something wrong with those in most need of insurance actually paying most of their costs. Indeed that NI is NOT insurance, and in their mind was never intended to be.

The poor can't pay for pensions etc (or don't see it as a priority) so the "rich" should pay for their provision via the tax system. Doing otherwise is somehow "unfair".

The problem with this concept is that while most of the "rich" are nice people who want to help their fellow citizens, there comes a point where they feel that they should not have to do everything. That just possibly those in need, might be expected to do a bit to help themselves.

I could go on with the fallacies that some socialists (not all) believe and argue, but I won't.