NICs State Pension

Research from the Pension Policy Institute has recently compared the value of state pension received with personal national insurance contributions (NICs).

It is often mistakenly thought that NICs accumulate in a government fund to pay for future benefits, similar to how the traditional pension scheme operates – but this is not the case. NICs are in fact another form of tax on earned income. Unfortunately, Chancellors past and present have exploited the fact that NICs tend not to be very well understood and therefore have found them easier to increase than Income Tax.

The Pension Policy Institute report

An individual’s NIC record will ultimately determine how much state pension they will receive at retirement age, so the question of whether NICs provide value for money in terms of  pension benefits is an important one. The Pension Policy Institute’s report modelled the employee NICs payable and pension outcomes for men and women aged 20, 40 and 60 with earnings in the bottom 10%, middle and top 10% of earnings.

They made the assumption that middle earners would have a life expectancy that matched the principal projection from the Office for National Statistics (ONS). They believed that people on the lower end of the earning scale would live three years less and high earners three years longer than the ONS projection. That socio-economic gap which spans six years has been noted by the ONS before, and is a reminder of the impact income has on life expectancy in this country.

The PPI published a series of data to show what proportion of each person’s state pension was funded by their NICs for different demographics, less employer contributions. With reference to the table below, anything less than 100% implies there is more coming out in pension than what went in as NICs.

  Men Women
Income level Bottom 10% Average 50% Top 10% Bottom 10% Average 50% Top 10%
Age 20 28% 56% 86% 18% 39% 71%
Age 40 31% 65% 101% 20% 43% 81%
Age 60 36% 60% 79% 22% 42% 68%

Source: Pension Policy Institute January 2023.

The results

By looking at the data above, it seems as though women are better off than men, perhaps due to living longer. Under the 2016 state pension rules, where pension accrual is at a flat rate regardless of earnings, lower paid individuals are benefitting more than the higher paid here.

With this in mind, now is a good time to check your own NIC record as the opportunity to pick up missed payments beyond six years ago will cease from 6 April. For more information on how to check your record, read our recent blog.

The Financial Conduct Authority does not regulate tax advice. 

Tax treatment varies according to individual circumstances and is subject to change.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Luke Norman

Chartered Financial Planner

Luke began his career in financial services in 2013.

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