National Insurance and the state pension

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2019 National Retired Members Conference
6 June 2019

The National Insurance scheme was established in 1948 to provide unemployment benefit, sickness benefit, retirement pensions and various other benefits to employees and pensioners in the United Kingdom (UK). From the contributions an initial allocation is set aside for the National Health Service (NHS) and the remainder held in the National Insurance Fund (NIF) which is monitored by the Government Actuary. The NIF is run on a pay as you go basis and legislation means that contributions to it can only be used for contributory benefits with any surplus held in a short term investment account. That surplus is estimated to be £26.2 bn at 31 March 2019 (up from £24.2 bn in March 2018). For some years the Government has been borrowing from this surplus to fund other public expenditure thus reducing their need to borrow from other sources in order to “balance the books”. This however means that the surplus cannot be used to improve benefits including the state retirement pension.

At present the full rate weekly state pension under the “new” system is £168.60, and under the “old” system is £129.20, representing an annual income of £8767 or £6718 respectively. By comparison the National Living Wage / National Minimum Wage is set at £8.21 per hour for someone over 24. Thus someone of that age working a 40 hour week receives £328.40 a week – equivalent to £17076 annually. However for a fair comparison income tax and National Insurance must be considered. The annual income tax personal allowance is £12500, and so someone whose only income is the basic state pension is not liable for income tax nor (because they are pensioners) for National Insurance. However in the scenario above a “living / minimum wage” employee would pay £1013 in tax and £915 in National Insurance giving a residual income of £15248. That is more than twice as much as a pensioner on the “old” system and 1.7 times that of one of the “new” system.

The Organization for Economic Development reported in December 2017 that the UK population is ageing rapidly with high levels of relative poverty among the over 75s and with 20% of British over 80s classified as obese compared with 10% of Italians.

Definition of the UK poverty level varies but one indicator, the Relative Low Income Threshold, is defined as 60% of the median national income. For 2016/17 it was £296 a week for a pensioner couple before housing costs. No figure is given for a single pensioner but for a working age single person it was £198 a week. Another indicator, the Minimum Income Standard, is the weekly amount needed to have an acceptable standard of living. For 2018 the weekly UK Minimum Income Standard for a pensioner couple before housing costs was £364 and for a single working age adult it was £288. However it has to be remembered that in pensioner couples one or both often receive less than the full state pension. These figures exclude housing costs and the cost of food is the same for all so the implication is that two pensioners can live nearly as cheaply as one working age adult. That’s clearly an indefensible assumption. It’s no wonder that UK pensioner poverty is so high.

Conference notes the increasing level of the NIF surplus and the disparity between the financial treatment of state pensioners and other low paid groups, and calls on the National Retired Members’ Committee to liaise with the National Executive Council, the National Pensioners’ Convention, Age UK, the Scottish Pensioners’ Forum and other relevant organisations to press the Government to increase the basic minimum state pension so that by 2020 all pensioners receive an income at least equivalent to the Minimum Income Standard.