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Reviving contracting-out of the state pension will benefit millions in retirement
Despite the UK previously enjoying one of the most successful systems of private pension provision in the Western world due to contracting-out, the last two governments have reintroduced full-scale state provision. In the face of an ageing population, this has placed unsustainable pressure on public finances.
In Growing the UK pension pot: The case for privatisation, Philip Booth and Kristian Niemietz propose a system whereby individuals could forego half of their state pension in return for a national insurance rebate. Reinvigorating this previously successful policy would allow large numbers of people who have no capital to be able to accrue a rebate to invest even if they had not paid national insurance contributions. The proposals set out would thus particularly help low-earners, carers and stay-at-home parents.
Increasing peoples’ freedom to invest in their retirement:
- Millions in retirement would benefit from the financial freedom to invest their pension as they saw fit, relying less on the state pension as a primary source of income. This would lead to an increase in the proportion of people accumulating considerable pension assets, allowing for a more comfortable retirement.
- Developing a well-functioning national insurance rebate scheme would see a 40-year-old receive a rebate of around £3,000 per year, if the state pension was linked to earnings
Alleviating pressure on the public purse:
- Present and future generations are at risk of being crippled by the growing debt burden in the UK. In order to meet future pension commitments and be debt free by 2060, the general public face substantial tax hikes or cuts to public spending of as much as 25%.
- In 2011, fewer than two million people contracted-out through a private pension, down from over four million in 1994/95. This drastic decline in the proportion of people saving through personal pension schemes places an increasingly heavy burden on the public finances. Encouraging individuals to save through alternative schemes, via contracting-out, would dramatically ease this financial burden.
Helping the most vulnerable:
- Rather than reflecting the level of national insurance contributions paid by an individual, rebates would be equal to the value of the state pension forgone. As a result, people on low incomes and those with carer responsibilities would find themselves able to build a substantial pension pot without relying on the state pension under the proposals.
Ending perverse incentives:
- Government action has continued to disincentivise personal saving. The coalition government is currently in the process of abolishing contracting-out from the state pension, suppressing efforts to search for alternative means of saving.
Commenting on the research, Professor Philip Booth, Editorial and Programme Director at the IEA, said:
“Under Gordon Brown and then under this government, our widely-admired system of private pension provision has been eroded and replaced by state provision. This proposal would allow all citizens – including the least-well-off and those with caring responsibilities to accumulate substantial private pension funds and reduce their reliance on the state pension.”
Notes to Editors:
To arrange an interview about the report please contact Camilla Goodwin, Communications Officer, [email protected] or 07821 971443.
The full report Growing the UK pension pot: The case for privatisation, by Philip Booth and Kristian Niemietz can be downloaded here.
Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at the Cass Business School where he was formerly Associate Dean. He has an undergraduate degree in economics from the University of Durham and a PhD in Finance. He is a Fellow of the Institute of Actuaries and the Royal Statistical Society.
Kristian Niemietz is Senior Research Fellow at the Institute of Economic Affairs. He has previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise, and as an economics tutor at King’s College London. During his graduate studies, he interned at the Central Bank of Bolivia, the National Statistics Office of Paraguay and at the IEA.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
The IEA is a registered educational charity and independent of all political parties.
Since it was formed during the Great Depression, Age Endeavour Fellowship (operating under various titles) has been concerned with the dignity of work and its benefits to physical and mental health and to general welfare and prosperity: latterly it has focused on the older age groups and will continue to do so.