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Expert busts state pension funding myths as system is 'very different' to the past

An expert has dispelled a misunderstanding about how the state pension works and is funded through National Insurance (NI) contributions.

The Conservatives have recently been criticised by Labour for their plans to eventually scrap National Insurance, over concerns this could put in jeapordy the funding for the state pension.

But Pete Glancy, head of policy at Scottish Widows, said in reality state pension payments are not solely funded through National Insurance.

He told Express.co.uk: “National Insurance was originally introduced to fund the NHS and the state pension, but the reality today is very different.

“It’s just one piece of the tax puzzle alongside income tax, corporation tax and VAT, all of which flow into one central pot to fund public services.”

He added: “While scrapping NI would reduce one revenue stream for the Government, to suggest any direct link, and therefore consequence, to the state pension is misleading and there is no reason that a change would impact state pension policy decisions.”

However, other experts have raised concerns about how the state pension would be funded should National Insurance be abolished.

Steven Cameron, pensions direcor at Aegon, previously told Express.co.uk it could become the norm for the Treasury to provide special grants to cover a shortfall in fundig for the state pension.

He also called on ministers to clarify how the ‘National Insurance Fund’ works, which is referred to in this Government accounting document.

The document states: “The National Insurance Fund (NIF) holds National Insurance Contributions (NICs), paid by employees, employers, and the self-employed.

“Voluntary contributions are also paid into the Fund. Receipts paid into the NIF are kept separate from all other revenue raised by national taxes and are used to pay social security benefits such as contributory benefits and the state pension.”

Express.co.uk put his concerns to the Treasury and we were directed to comments made by Chancellor Jeremy Hunt.

He told the Treasury Committee in Parliament: “The amount of money raised by National Insurance does not determine the amount of money going into the state pension or the NHS.

“It has not done for very many decades. The evidence for that is the Budget because in the Budget we announced a £6billion increase in funding for the NHS and a £900 increase in the state pension, which is going up by 8.5 percent — around three times the rate of inflation.”

The are growing concerns about how the state pension will be funded, after state pension payments increased 8.5 percent in April, following a record 10.1 percent increase the year before.

The full new state pension is now £221.20 a week while the full basic state pension pays £169.50 a week.

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