Viral pensions post has its maths all wrong

20 April 2022
What was claimed

People should get much higher state pensions because both employees and employers paid into them, and with interest, that should generate millions in income for pensioners when they retire.

Our verdict

This is a fundamental misunderstanding of how state pensions work. National Insurance contributions paid by employees and employers essentially fund that year’s state pensions, plus some other benefits. Private pensions are invested and generate income.

What was claimed

MPs get free healthcare, retirement packages, paid holiday and unlimited paid sick days.

Our verdict

MPs can’t claim private healthcare on expenses, but can use the NHS like anyone else. They do have a workplace pension scheme. They get paid regardless of how many holiday or sick days they take.

We’ve seen a number of Facebook posts with a list of claims about pensioners, telling people to “print this off, send it to a Rishi SUNAK and demand payment [sic]”.

The 600-word long viral essay makes a number of claims, including some dodgy calculations that claim to show that if you earn £15,000 a year, after 50 years you should be entitled to tens of thousands of pounds of pension payments.

Not only are the calculations incorrect, but they fundamentally misunderstand how state pensions work in the UK. Essentially, today’s National Insurance (NI) contributions go into a big pot that pays today’s pensioners—the money is not invested as private pensions are.

What happens to the state pensions of people who die?

The text claims: “The only thing wrong with the government's calculation of available pension is that they forgot to figure in all the people who died before they ever collected old age pension. Where did all that money go?”

In certain cases, if someone who has reached state pension age dies, their surviving partner (if they were married or in a civil partnership), depending on the exact circumstances, may expect to inherit some of that pension.

This is particularly complicated because there are two types of state pension now: the basic state pension for those who reached state pension age before 6 April 2016, and the new state pension, for those who reached state pension age after that date. Under the older system, people could get a state pension based on the National Insurance contributions of their late partners and could inherit a top-up from the additional state pension

But under the newer system, pensions are based on that individual’s National Insurance contributions only and so what exactly a surviving partner can inherit depends on the exact circumstances, such as when they were married or if their partner deferred collecting their state pension.

You and your employer pay National Insurance

The post says: “Remember, not only did you and I contribute to our Pension, our employer did, too. It totalled 15% of your income before taxes. If you averaged only £15 000 over your working life, that's close to £220,500.”

If your taxable income was £15,000, and both you and your employer paid 15% of that, it’s correct that the total over 49 years would be £220,500. 

But if your salary was £15,000,  the amount you and your employer would end up contributing would be much less than this because there’s a minimum threshold under which you don’t pay National Insurance. 

And while it’s true that both employee and employer pay National Insurance on wages, at the time of writing, the rate isn’t 15% for both. Employees pay 13.25% and employers pay 15.05%, above the primary threshold.

How do state pensions work?

The post claims that people who contributed a certain amount per year should see this money in future, plus interest. This is how private pensions work, but not state pensions.

National Insurance contributions don’t only pay towards state pensions, but mainly do. This tax, paid by employees, employers and the self-employed, also goes to paying for contributory benefits (like contributions-based jobseeker’s allowance and contributory employment and support allowance) and some of the money also goes to the NHS.

Unlike most UK taxes, NI is paid into a specific pot called the National Insurance Fund, rather than being put with the rest of the tax money collected for the Treasury. But even if the fund is in deficit one year, the government will always find a way to pay the pensions and benefits it has to, by injecting money into it. And if it’s in surplus, the government may use the money to pay off the national debt.

According to the House of Commons library: “The Fund operates on a 'pay as you go' basis: broadly speaking, this year’s contributions pay for this year’s benefits. Retirement pensions account for over 90% of benefit expenditure from the Fund.”

So essentially, today’s National Insurance contributors are paying today’s pensioners, rather than historic payments from when they were working. 

The post argues that the pensions collected should be much higher than they are, if 5% interest was paid on it by the government. But in reality, those contributions are spent almost as soon as they are collected, by the pensioners and those receiving contributory benefits at that time. 

Private pensions on the other hand, do work like this, in the sense that generally, you pay into a pot which is invested, so your money has the opportunity to accumulate interest and gain value.

Even if state pensions worked as the post claims, its headline figures would be wrong

The post also claims if you contribute £2,250 a year for 50 years with 5% interest you should have almost £900,000 by the end. This calculation is wrong; after 50 years you’d end up with closer to £500,000 at that rate of interest. 

MP benefits

The post claims that MPs get “free healthcare, outrageous retirement packages, 67 days paid holidays, three weeks paid holidays, unlimited paid sick days”.

MPs have the same free access to the NHS as anyone ordinarily resident in the UK. They can’t claim for private medical insurance on their expenses.

MPs do have their own workplace pension scheme, like many workplaces, plus an extra one for ministers. For MPs, the payout is between 1/60th to 1/40th of pensionable salary, depending on how much they chose to contribute. However, if MPs have other “substantial benefits” from other private pensions, their pension could be cut back to ensure they don’t breach the maximum.

MPs don’t have holidays in the traditional sense and how much time they take as actual holiday will vary. Because they are “office holders”, they get paid a salary even if they don’t attend parliament. While they don’t have to attend every sitting, it’s likely that they’ll have to attend certain votes that their party needs them to attend, like those with a three line whip. And their work isn’t just in Parliament—it will likely include constituency work, such as surgeries. So while it’s true that Parliament is in recess for approximately 18 weeks a year, this time isn’t necessarily holiday.

As for sick days, MPs do get paid regardless of how much they attend Parliament, and don’t get any additional sick pay

As for aid, it’s true that the UK has spent billions on aid as the post claims. In 2021, it spent £11.5 billion. And historically, it has funded aid programmes in the countries mentioned (Haiti, Chile, Turkey, India and Pakistan). 

By contrast in 2020/21, the government spent £101 billion on state pensions (in Great Britain, as benefits are devolved to the Northern Ireland Executive).

Image via James Hose Jr via Unsplash

Correction 21 April 2022

A previous version of this article incorrectly said the Facebook post had claimed you’d have £900 million if you invested £2,250 each year for 50 years with a 5% interest rate. The post actually said you’d have close to £900,000.

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