National insurance contributions will need to increase by 5 per cent in the future to fund the state pension, the Government Actuary’s Department has revealed.

In a news update, GAD said the state pension accounts for more than 90 per cent of benefits paid from national insurance. Unlike ‘funded’ private pensions, state pensions are paid on a ‘pay as you go’ basis so that future state pensioners are reliant on the national insurance contributions of future workers to pay their pension.

Commenting, Aegon pensions director Steven Cameron said: “The Government Actuary’s Department (GAD) has a key role to play in advising the government on the affordability of long term policies, such as state pensions, the cost of which can be significantly affected by changes in life expectancy. What many people may not realise is there’s no big pot of money set aside to pay future state pensions.

“Instead, they are funded on a ‘pay as you go’ basis meaning future state pensioners are reliant on the national insurance contributions of future workers to pay their pensions, creating the potential for intergenerational tension. There’s always a trade-off to be made between state pension age, the yearly amount of state pension paid out, other benefits national insurance pay for such as the current hot topic of social care, and at what rates national insurance contributions need to be set to cover these costs.

“For many, the state pension continues to be a core part of their total income in retirement and something they rely on. While governments may be tempted to focus on the issues they face in the short term, for something like state pensions, they need to think much further ahead. Projections such as this from the GAD need careful consideration by the government to make sure state pensions remain affordable not just now but over the long term.”

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