PER­SONAL AC­COUNT

The Daily Telegraph - Your Money - - FRONT PAGE - Richard Dyson Tele­graph Money,

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

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