Spring Statement 2022: Concerns raised over impact of NI threshold rise on state pension funding

Industry experts have raised concerns over the impact of the Chancellor’s decision to increase the national insurance (NI) threshold to £12,750, warning that this could affect NI credits for state pensions and state pension funding more broadly.

In a Spring Statement bereft of any major pension reforms, Chancellor, Rishi Sunak, confirmed plans to ease the rising cost of living by raising the NI thresholds, in addition to a cut in fuel duty and a future cut on basic rate income tax.

Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, suggested that these changes will help put some money back in the pockets of lower earners at a time amid rising costs of living.

However, she argued that care must be taken so that workers earning less than £12,570 per year do not lose access to vital NI credits for state pension.

“The state pension forms the backbone of most people’s retirement and therefore, they should ensure they do not incur gaps unnecessarily, that mean they end up with less in retirement," she explained.

"Many benefits come with automatic NI credits. For instance, Child Benefit, Universal Credit and Job Seekers Allowance will credit you automatically. Other benefits such as statutory sick pay will give you credits if you apply for them. It is therefore vital people worried they may no longer be getting NI credits check to see what benefits they are entitled to, so these credits can be made.

"A further option for people looking to plug gaps in their state pension record is to buy voluntary National Insurance credits. Each missing year costs around £800 and will give you 1/35th of your entitlement. Over the course of retirement they can be a very good value way of boosting your state pension entitlement.”

Concerns have also been raised by Aegon pensions director, Steven Cameron, who said that whilst the rise will be welcomed by many to help mitigate the cost of living squeeze, the lower NI receipts could cast have longer-term ramifications on the current state pension funding system.

He explained: "Setting aside the 1.25 per cent increase, which will be ringfenced to pay for social care and NHS support, raising the threshold will reduce the amount being collected in NI from today’s workers to pay for today’s state pensions.

"This will happen not just in the coming year but also in all future years, storing up longer-term challenges for the funding of state pensions which are paid for out of NI on a pay as you go basis.

“There have been calls for the planned increase in state pension age to 67 by 2028 to be deferred, but having lower NI receipts will make that less affordable."

In addition to this, whilst the government recently committed to reintroducing the state pension triple lock after the 2022/23 suspension, Cameron warned that lower NI receipts could call into question the ongoing affordability of maintaining the triple lock beyond this parliament.

"Based on current predictions state pensioners could receive a bumper 8 per cent plus increase in April 2023, which will take into account September's projected inflation figure," he continued.

However, Cameron also warned that those above state pension age do not pay NI on earned income so will not benefit from the threshold increase, echoing recent concerns over the impact of the triple lock suspension amid rising inflation.

These concerns were also raised by Shadow Chancellor, Rachel Reeves, in her response to the Spring Statement, querying the chancellor as to what analysis has been done on the impact of the lower uprating.

Reeves stated: "We know that pensions and security are not going to keep up with inflation, so pensioners and those on social security will be getting a real terms cut in their incomes.

"What analysis has the chancellor done on the impact of benefits being uprated by less than inflation. How many more children and pensioners will drift into poverty because of the choices of this government?"

Commenting in response, however, Sunak emphasised the role of the triple lock more broadly, confirming that pensions are now £2,300 higher than they were in 2010, and £700 more than if the triple lock had not existed in that time.

"I’m pleased to say that the state pension relative to earnings is now at the highest level it has been in over 30 years," he added. "This party will always be on the side of pensioners."

Concerns have also been raised over the pension impact of the Chancellor's decision to cut basic rate of income tax to 19 per cent from April 2024, with Aegon head of pensions, Kate Smith, warning that there is "a pensions fly in the ointment".

She explained: "People receive tax relief on pension contributions at their highest marginal tax rate. A reduction in the basic rate of income tax means that people will get lower tax relief on their pension contribution, meaning that the government top-up directly into their pensions will be less.

"This means that to get the same retirement income, people will have to pay a little bit more into their pensions.

“If they can, people may want to think about putting more into their pensions over the next couple of years to make the most of the current 20 per cent tax relief.”

Indeed, despite the concerns raised over the broader impact of the Chancellor's changes, industry experts have suggested that the savings could allow workers to contribute more to their pension.

PensionBee CEO, Romi Savova, for instance, explained that the estimated £300 a year saving from the increased NI threshold could enable savers to top up their pension by £25 more a month.

"Over time, an additional monthly contribution of this magnitude could help put another £15,000 in a saver’s pension," she continued.

"New tax cuts such as these can clearly generate additional saving opportunities for pension savers, however, for many people feeling the squeeze, this reprieve will not go far enough.”

Barnett Waddingham pay gap analytics senior consultant, Melissa Blissett, also suggested that the changes could help women in particular, and help improve the gender pensions gap in the long run.

She stated: "The change could make it more affordable for women to contribute more to their pensions, and will make salary exchange more effective. But there is still a long way to go to solve the issue.

"Employers need to do more to understand and reduce their gender pay gap. And for the next Budget, removing the minimum earning requirement from auto enrolled pensions, changing the state pension to better reflect career breaks, and moving to a flat rate of pension tax relief should all be serious considerations for the Chancellor to make the pensions system more reflective of today’s society and fairer to all.”

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