The state pension increases each year in line with the triple lock (Image: GETTY)
Ministers may be forced to increase National Insurance (NI) or other taxes to meet the rising costs of the state pension.
Payments increased by a record 10.1 percent this April and another sizable increase of seven percent or more is predicted for next April, in line with the triple lock policy.
Steven Cameron, pensions director at Aegon, told Express.co.uk: “The state pension triple lock is leading to major increases in the cost of the state pension.
“Every one percent increase costs around an extra £1billion for the current and every future year.”
He explained how National Insurance receipts from today’s workers go out to those claiming their state pension at present and that sometimes there is a small buffer of funds where the NI received is more than is paid out.
He said: “If this runs out, then the Treasury can grant a special payment which comes out of general taxation.
The state pension increases each year in line with the triple lock (Image: Getty)
“However, this is designed as a temporary measure and if NI receipts were consistently insufficient to meet outgoings on state pensions, the Government would need to consider a more permanent solution which could be to increase NI or to formally use other tax revenues to part-fund the state pension.”
Financial adviser Daniel Abbott, from Hoxton Capital Management Advisory Group, warned another concern for funding the state pension is when inflation outstrips wage growth.
She said: “As National insurance contributions are proportional to wage growth, for any years where wage growth is lower than either 2.5 percent or the inflation rate, the gap will put pressure on NI’s ability to fund the state pension liability.
“Therefore, NI rates will need to be increased or other taxes used. As the UK Government budget is already running at a deficit, they will unlikely be able to use other taxes already in place elsewhere.”
Tim Schmidt, founder of IRAInvesting.com, also warned having the state pension rely on NI receipts may make the policy unsustainable.
The state pension increases each year in line with the triple lock (Image: GETTY)
He said: “I reckon it’s a tad risky for the state pension to solely rely on National Insurance. “With both the new flat rate and older basic state pension seeing an uptick, diversifying sources of funding seems like a prudent move. It’s like they say in the investing world: don’t put all your eggs in one basket.”
Mr Cameron also said the Government’s recent move to increase the allowance for NI, aligning it with the income tax threshold, is putting even more pressure on the triple lock.
He added: “However, the fact that the starting threshold is currently frozen while earnings growth is high does mean in coming years, NI will be levied on a higher proportion of income than at present.”
Looking at what tax increases could be used to cover rising state pension payments, Mr Cameron suggested the political parties may look at ways to increase NI.
He said: “One suggestion which has been made is to require those above state pension age to pay National Insurance on any earnings beyond that age – this is currently exempt.
The state pension increases each year in line with the triple lock (Image: Getty)
“One recent Government initiative which has similarities was the increase in NI of 1.25 percent (employer and employee) to pay for a new deal on social care funding.
“It was to have become a separate social care levy from April 2023. This was reversed in November 2022, shortly after being introduced and the social care funding deal itself pushed back two years until October 2025.
“This is something to watch out for in the political party manifestos ahead of the General Election.”
Mr Schmidt suggested raising capital gains tax is another option. He explained: “Increasing the Personal Allowance might be off the table until 2028, but there’s a whisper in financial circuits about the potential of raising the capital gains tax or even adjusting the stamp duty.
“Just the other day, I was conversing with a colleague about how first-time buyer reliefs are shifting.
“Could this be a telltale sign? Although some might say the most logical approach is to tap into the additional rate tax thresholds, especially with the 45 percent band threshold being adjusted, it’s worth noting that there’s no one size fits all answer.
He said increasing the inheritance tax bands could also help buffer the state pension pot but this would have to be balanced to not deter people from passing on their assets.
Asked about the possibility of a new tax to fund the state pension, he said: “Introducing a new tax might sound daunting, but I’ve seen enough in my investing journey to never rule anything out.
“Considering the significant shifts like the Pension Credit minimum income guarantee, there’s a chance that a fresh tax, if pitched rightly, could be accepted. Perhaps something targeting luxury items or even a slight tax on digital transactions.”
Ms Abbott said increasing NI or using increasing tax receipts from inheritance receipts is “very possible”.
However, with regard to a new tax, she said: “It is possible that new taxes could be introduced, but it is unlikely they will as political pressures with regards to re-election would mean it would be damning for a party’s hopes of being re-elected.”
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