PERSONAL ACCOUNT

The new state pension system might hasten the end of National Insurance

The new state pension system may have an unintended – but for once welcome – consequence: it might hasten the end of National Insurance.

National Insurance is a myth. And it may be more widely perceived as such now that, under the new state pension system, millions of people will work and pay NI without actually adding anything further to their state pension entitlement.

Yes, it’s tricky to understand, but the new state pension system allows you to accrue only so much by way of retirement income. After that, you keep on working and paying NI, but your state pension entitlement doesn’t grow. This was not the case in the past. The old state pension system allowed entitlements to build right up to state pension age. You needed 30 years’ contributions to qualify for a basic state pension, but contributions thereafter would boost your second state pension.

Under the new, single state pension system, applying from April 2016, that’s no longer the case. To get the full amount people will need a record of 35 qualifying years. Given that state pension age is rising, it’s likely that a great many people will work for more than 35 years.

But there’s a more pressing reason why people paying NI should feel cheated now in relation to their state pension.

As part of the transition from the old to the new system, many people are effectively “ahead” in building up an entitlement under the new rules.

Actuaries Willis Towers Watson have done some sums. They say, for example, that “someone aged 40 when the new state pension was introduced in April 2016 could have already built up a state pension entitlement worth slightly more than the full new state pension, after paying national insurance contributions for just 22 years”.

This is an extreme case, Willis Towers Watson points out, because the individual would have had to start work age 18 on a reasonably good wage and worked continuously from there.

But doubtless there are many in their forties and fifties who will continue paying NI contributions for a decade or even two without further boosting their pension.

On discovering this, they may well pause and say: “Hold on. I’ve obtained the maximum state pension entitlement. Why then am I still paying the same NI contributions?”

In fact one correspondent emailed exactly that to