Pensions Bill

This group of amendments concerns the payment of extra national insurance contributions after state pension age as a means of boosting state pension entitlements where necessary. I thank the noble Baroness, Lady Thomas of Winchester, and my noble friend Lady Hollis for raising this important issue. I shall deal first with the amendment of the noble Baroness, Lady Thomas. The raison d’être for our reforms to the basic state pension is to maximise the number of people who retire on a full pension. The amendment is therefore entirely compatible with the intention behind Clause 1. However, no doubt the noble Baroness has sensed that there is a ““but”” in my response, and indeed here it is: it is simply unavoidable that a small minority of people will reach state pension age without the requisite 30 years of contributions or credits for a full basic state pension. We know that in 2010 around 75 per cent of women and more than 95 per cent of men will retire with a full basic state pension, and by 2025 the proportion retiring with a full pension will increase to more than 90 per cent for both men and women. Therefore we must consider very carefully whether any remedy is proportionate to the problem it is seeking to alleviate. The Government are of the view that the amendment is not proportionate because of the potential difficulties it would cause to employers, particularly small employers. Currently, employers operate on the simple rule that they do not deduct national insurance contributions from any of their employees who have reached state pension age. Therefore, let us consider the detail of the amendment. It would allow anyone who reaches pension age without the requisite 30 years for full basic state pension entitlement to continue paying contributions provided he or she does not start to draw his or her pension. So what would this mean from the employer’s perspective? It is, quite simply, a recipe for confusion. It brings into the whole tax and national insurance contributions equation the concept of voluntary deductions. This would be complicated enough if the option were available to all people working past state pension age; worse if it were to be restricted to the small minority—around 10 per cent by 2025—of individuals who would not have otherwise accrued full basic state pension rights; and far worse if the period for which the option was available were to vary from individual to individual. This is the reality of what the noble Baroness is proposing. For each employee over pension age, the employer would need to know whether they were eligible to pay contributions; if so, whether they wanted to pay contributions; if so, whetherthey wanted to do so for all of the tax years for which they were eligible to pay, or for only one of them, or for some of them; and, indeed, whether they wanted to pay throughout a tax year or only sufficient within a tax year to gain enough credit. As the amount payable by way of contributions would depend on the individual’s earnings, the ““to pay or not to pay”” decision may not be as straightforward as it might appear at first glance. For a person earning, say, £120 a week, the amount payable by way of contributions for a full tax year would currently be around £115, but for a person earning around £35,000 a year, it would be around £3,250. So around £3 a week for life for £115 would, I am sure, generally be an attractive proposition; putting the price tag up to £3,250 would make it far less so. The complexities inherent in the amendment, particularly for employers, make it simply unworkable, in our view. I hope that I have explained the reasons why we do not agree with the intention or the substance behind the amendment. The amendment of my noble friend Lady Hollis occupies much the same territory as the amendment of the noble Baroness, Lady Thomas, although there are two essential differences. First, it restricts the right to pay contributions to people who work past state pension age; but, secondly, this right would not be restricted to those who defer their state pension. I have already explained the potential difficulties for employers raised by the first of these differences and I do not intend to labour the point. I would like to make some observations on the second difference; namely, that under the terms of the amendment people would be able to pay contributions and draw their state pension simultaneously. The reason people would be paying the contributions would be to increase their state pension. This raises an interesting question about the point at which the increased entitlement would crystallise. There could be, I suggest, three options. The first is at the point the person has paid sufficient contributions to make that tax year a ““qualifying year””, which would be when they had paid contributions on earnings of around £4,500. However, when this occurs depends on how much the individual earns. The second is at the end of the tax year in respect of which contributions have been paid. The third is only at the point the person stops paying national insurance contributions. The first option would entail the employer or the employee keeping a cumulative total of the earnings on which contributions have been paid and notifying the Pension Service at the point a qualifying year had been achieved. The second option seems more practicable. However, there is inevitably a time lag between the end of the tax year and the contributions being posted to the person’s national insurance account. The only way of avoiding delays in getting the enhanced pension into payment would be for the employer to send details of the earnings directly to the Pension Service. This would be in addition to the normal end-of-year return to HMRC. The third option would avoid annual recalculations of the individual’s pension entitlement, but does not seem particularly equitable. I am not saying that it is impossible to sort out these practical difficulties, but they are potential problems. I come back to the point I made in response to the amendment of the noble Baroness, Lady Thomas, about whether the solution is proportionate to the problems. My contention is that in the case of the amendment it simply is not. Perhaps I may pick up on a couple of points. My noble friend Lady Hollis referred to auto credits—the freebie for the golf course. These, of course, will be phased out for men from 2010 in line with the rise in the women’s pension age. It is a transitional issue and will disappear. As regards whether employers are getting people on the cheap, employers continue to pay national insurance contributions where an employee is over pension age. The exemption applies only to the employee’s share of national insurance contributions. There are one or two other points we ought perhaps to reflect upon if we are going to complete the intellectual analysis. It is suggested that the contributions should generate entitlement to both the basic pension and the state second pension. Would it therefore be equitable to restrict the option to pay national insurance contributions to those who do not qualify for a full basic pension? I suspect the answer is no, given those people who, prior to the introduction of S2P in 2002, were out of the labour market because of caring responsibilities or were low earners who will have accrued little or nothing under SERPS. If that were the case, however, should the option be available to everyone working past pension age, or only to those whose SERPS and/or S2P accruals are below de minimis? If so, how would those be aligned? If people in work were to have the option to pay contributions past pension age, would it be equitable to exclude those who do not work but carry on their caring responsibilities after pension age from accruing further pension entitlement? We would be changing a fundamental part of the Bill. Again, the answer is no, on the basis that the individual concerned could reasonably argue that, were it not for their role as a carer, they would continue in work. That raises a supplementary question, though: up to what age is that a reasonable premise? Would it be 70, 75 or 80? I do not wish to labour the point, but we need to be mindful that, although on the face of it this may seem a pretty straightforward and reasonable proposition, it would in reality require significant re-engineering of quite a few parts of the state pension machinery. For those reasons, the Government do not support it.