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Can the UK afford its people’s pension expectations?

Philip Hammond’s Budget - amongst other things - identified areas where the Government feels there is now underpayment for the expense of state benefits available.

Previously, employees were entitled to higher state pension benefits due from additional National Insurance Contributions (NICs) paid by employees and employers alike. The Graduated pension, State Earnings Related Pension Scheme (SERPS) and state second pension (SP2) were all designed to enhance incomes at retirement, with the additional costs for these being met through these higher NIC contributions.

We are now being introduced to the flat rate state pension which is available to everyone providing they have achieved at least 10 years’ NIC contributions, with a total of 35 years needed to receive the full entitlement.

Transitional benefits available for those who have been part of the additional state pension system will gradually expire, thus giving the same level of state pension benefits to the self employed and employed individuals.

The self employed will therefore need to pay more towards this overall expense to equalise the costs to the employed and employers.

As we know, the Government has since back-tracked on its Budget announcement that NICs would increase for the self employed, although there are likely to be moves again to introduce it, possibly this Autumn. Whilst the proverbial can has been kicked down the road, there are a number of considerations to take into account.

The country’s debt continues to increase with each man, woman and child owing £25,000 of the £1.7 trillion outstanding: at £50 billion annually, the interest alone exceeds the UK’s defence budget for the entire year. With people living longer, this burden is only set to increase. Auto enrolment, the Government’s solution to the wilting value of the state pension, remains some years away from being effective in meeting individuals’ requirements.

‘Employed’ vs ‘Self employed’ is now out of date

The terminology of ‘employed’ and ‘self employed’ now seems dated. We must recognise and take responsibility for our own financial wellbeing in retirement. Even with the Government’s triple lock guarantee designed to maintain the future value of the state pension, this is still likely to be woefully inadequate based on the expectations that individuals have for retirement.

With this in mind, the Government has asked Matthew Taylor, Chief Executive of The Royal Society of Arts to lead a review to consider how employment practices need to change in order to keep pace with modern business models. This will include areas such as security of employment, pay and workers’ rights, progression and training, balance of rights and responsibilities, representation, opportunities for under represented groups and new business models. If you want to see how this review is going, or have views and ideas you would like to contribute to the review, please use the link below. The deadline for submissions is 17 May 2017: https://beis.dialogue-app.com/matthew-taylor-review

In short, the ageing population and our expectations for retirement cannot be met by the current state pension entitlement available. The aim to equalise everybody’s state pension to a flat rate position needs to be paid for - and this is likely to result in the self employed having to increase the level of National Insurance contributions that they pay. It may even see a redefinition of ‘employment’ and ‘self employment’.

I expect to see more from the Chancellor once this has sunken in and despite the anger that may be generated, this seems the best way to keep the system moving along without the country’s debt becoming unmanageable.

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