Pensions and National Insurance

UK government plans for a "simple" flat-rate state pension have been announced. Instead of a basic pension of £107 a week plus various top-ups, recipients will get £144 in today's money from 2017 at the earliest. The government said this was fairer for the self-employed and many mothers.

The government's White Paper shows that there are short-term gainers but also longer-term losers from the policy. Further revelations quickly showed that they had not been telling the full story. For example, an analysis by the House of Commons Library found that 430,000 women born between April 1952 and April 1953, who will retire before the new scheme takes effect in four years, could be £1,900 a year (£36.55 a week) worse off than a man of the same age.

Gregg McClymont, Labour’s spokesman on pensions, said: “Ministers have been caught red-handed hiding the truth on pensions reforms. They have been caught with their hands in pensioners’ pockets. It’s about time this Government had the decency to be honest about who will lose out under its plans.”

National Pensioners Convention general secretary Dot Gibson sums up the government approach as a "con trick," explaining that future generations of pensioners will have to pay an extra five years worth of National Insurance contributions, work longer before they can retire and end up with less than they can get today.

It is the National Insurance contribution that I want to focus on, because it has not been given as much coverage as the winners and losers.

The reforms themselves may be cost neutral but the Treasury will pick up a windfall payment of £5.9bn because 6.9m workers in final salary schemes will no longer receive discounts on their national insurance contributions. This is on top of the Treasury’s £6bn ‘tax’ grab from public service pensions.

Workers NI contributions will increase by 1.4% and employers by even more. An extra £1,200 a year for an employee paid £40,000 a year. This will put even more pressure on good quality pension schemes in the private sector and place additional costs on the public sector at time when austerity cuts look as if they will go on and on. Taking even more spending power from workers and employers will have inevitable economic consequences.

This is something we have been watching with some concern in the Scottish public service pension scheme negotiating bodies since the original consultation paper. We highlighted this at the time of the consultation, so the UK Government knows full well what it is doing. This is a stealth tax if ever there was one.

Simplifying the state pension is a good thing in principle. However, the UK Government must ensure that the losers, the lowest paid in particular, do not lose out. They must also return the NI windfall to the workers and employers to ensure that good pension schemes are not undermined and the economy damaged even more.