MILLIONS FACE NEW TAX HIKES

Pensions crisis set to force Government to raise National Insurance

MILLIONS of workers face higher National Insurance bills to fund state pensions, the Government’s analysts have warned.

They said NI rates may have to go up by as much as 5 per cent to help maintain the stability of the pension fund. This would mean an annual increase of £120 on the average worker’s tax bill – and a £138 increase for their employer, according to pensions firm Aegon.

Any increase would be controversial because it would see younger workers forced to pay extra to fund the pensions of those who have already retired.

This is because people’s NI contributions do not pay for their own future pensions but the pensions of those who have retired. In addition, pensioners pay no NI – adding to a sense of intergenerational unfairness among the country’s young people.

The f i ndings were contained in a new report by the UK Government Actuary’s Department, which compiles

projections for ministers. It warned that Britain’s ageing population meant changes to the tax regime may be required to make the National Insurance Fund – most of which goes towards pensions – sustainable.

It said that unless action is taken, the fund will be exhausted by 033.

GAD’s report said the fund could be made to break even in future years but only if rates are ‘around 5 per cent higher than the current rates’.

Steven Cameron, of Aegon, warned: ‘There won’t be enough coming in from NI to cover the cost of paying the state pension. To stop that happening, NI contributions have to go up or the Government will have to make changes to the state pension or the age it’s paid from.’ At present, the NI rate for most employees is 1 per cent on earnings above £8,164. A 5 per cent increase would put this up to 1 .6 per cent.

For the average employer, the NI rate will go from 13.8 per cent to 14.5 per cent, pushing its bill of £ ,760 up by £138. For someone earning £45,000, the increase would mean their bill goes up by £ 1 to £4,645.

Mr Cameron added: ‘ What many people may not realise is there’s no big pot of money set aside to pay future state pensions.

‘Instead, they are funded on a pay-asyou-go basis meaning that future state pensioners are reliant on the NI contributions of future workers.’

Former pensions minister Baroness Altmann warned: ‘The Government Actuary is warning that NI contributions are not high enough to cover future state pension costs.

‘This is worrying because the new state pension system, which has only just started, was supposed to ensure future state pension costs would be sustainable.’

Tom Selby, a senior analyst at AJ Bell, told the Financial Times that the increases paint a ‘grim picture for the future of the state pension’.

He added: ‘The harsh reality is that, as demographics bite and the baby boomers head towards retirement, the cost of the state pension will inevitably boom. The options open to policymakers to plug the funding gap are not attractive. The Government Actuary Department reckons a 5 per cent increase in NI contributions would do the trick – hardly a realistic route for any politician wanting to maintain a grip of power.’

The Treasury said that it expected the fund ‘to have a surplus for the foreseeable future’, but admitted the ageing population would ‘pose a challenge for the public finances’. A spokesman added: ‘That is why we are committed to reducing the deficit and building an economy fit for the future.’