Raise NICs, not state pension age, to fund pensions deficit

Thursday, November 19, 2009 | Posted by: Richard Jameson
Categories: Protecting your wealth | Tags: Richard Jameson, NIC, retirement, tax relief, liability, pension, final salary scheme, Turner Report, private pension

The UK’s looming pensions calamity came to light in 2005 when Adair Turner of the Pensions Commission (now chairman of the Financial Services Authority) released the Turner Report into pension provision.

Among the many findings of the Pension Commission’s report was that the ‘dependency ratio’ (of individuals of working age in relation to those in retirement) shoots up sharply from 2010. Why? Because that’s when the baby boomers, born shortly after the end of the Second World War, turn 65 and begin to retire in great numbers – a trend that is set to continue until at least 2030.

What the Turner Report pointed out was that the next government would have to face up to this fact by the end of the next government term, ie, 2010. As we approach Turner’s 2010 marker, is the country prepared for the impact of an ever-greater proportion of pensioners to workers?

Should retiring baby boomers pay more NICs?
In Grant Thornton’s Tax Manifesto, we have looked at National Insurance Contributions for the individual compared to our European neighbours. The harsh reality is that if NICs are to fund state pension provision, what we are paying in the UK is too cheap, compared with our European cousins.

Can this mismatch continue? No.

How long will it continue? That is anyone’s guess.

What Grant Thornton is suggesting to the government of 2010 via its Tax Manifesto is that an NIC surcharge could be introduced to increase the level of contributions the closer one gets to retirement age. For example, from the age of 36 to 50, a 10% surcharge is levied; aged 51 to retirement age, a 20% surcharge.

However, from our consultation with the UK’s leading finance directors, these suggestions were clearly unpalatable. No government will want to pick up this hot potato. But someone will have to. And soon.

Raising state pension age ‘only a sticking plaster’ I have not discussed the erosion of the strength of private pensions through the dismantling of tax reliefs over the past decade, nor the cost for the taxpayer in funding final salary schemes for civil servants – a situation which appears overgenerous and unsupportable in the long term given the dangerous state of the public finances.

Even if the government had put aside funds for a rainy day before the credit crunch and the subsequent fiscal loosening, the challenge to plug the deficit. Given the circumstances, now it is extreme.

As is often the case with pension provision, steps taken to repair a deficit are too little, too late – and the raising of the state pension age may prove with hindsight to be only a sticking plaster.

Unless the future of state pensions is debated in a frank manner with all options on the table, will we drift to a point in time when the state pension suddenly collapses under the burden of those who depend upon it with too few to support it? A situation that would suit no one.

Image: Adair Turner © The CBI

Visit Grant Thornton’s Tax Manifesto web page, for our proposals for pragmatic tax changes following the 2010 general election. The Tax Manifesto combines economic analysis undertaken in conjunction with Lombard Street Research with the solicited views from a business community of 500 UK finance directors.

Read Richard Jameson’s previous posts on tax planning.