FOOL'S EYE VIEW
National Insurance: How To Boil An Egg

By Jane Mack (TMFJane)
August 24, 2001

A million years ago, when I was about 12, my mum asked me to salt the potatoes that she'd just put on to boil for supper. "How much should I put in?", I asked. At which point she said: "Oh for Goodness' Sake... do I have to do everything myself?" (As mothers do).

The thing is, I genuinely didn't know how much salt to put into the pan. You can't know until someone tells you, can you? It's a bit like that Delia Smith TV programme about how to boil an egg. It sounds like such a basic thing – and yet, there are lots of people who have never boiled an egg in their lives before and would genuinely like someone to tell them how to do it.

Unfortunately, it's the sort of question that might make others laugh – which means people don't dare to ask the question in case they look stupid!

It occurred to me the other day that National Insurance might be a bit like the "how to boil an egg" conundrum. We trundle through life knowing that we have to pay National Insurance contributions and that it's got something to do with the State Pension, but what is it? What's it for? Is it important?

National Insurance is a type of income tax and, as one of my accountant colleagues said to me recently, it is hopelessly, needlessly complicated and illogical. No surprise there then! It's used to pay for certain social security benefits such as sick pay and maternity pay and, of course, your State Pension.

It's paid by both employees and employers and in the olden days it was referred to as a National Insurance "stamp". This is because your employer literally had to buy special stamps to stick on each employee's card. The system's not so antiquated these days so the only thing you'll know about it is that whopping great sums of money get taken out of your salary before you see a penny of it.

The single most important thing that NI contributions pay for is the State Pension. Your NICs are currently being used to pay for the meagre pension that the UK's elderly worked for all their lives -- just as your old-age pension will be paid for by your children and grandchildren. The fact that we're having fewer and fewer children these days is mainly why the Government keeps trying to persuade us to save up for our own pension – there won't be too many youngsters around to pay for our old age when the time comes!

You will only be entitled to the basic State Pension if you've made full NI contributions throughout your working life. The Government expects you to work for 44 years to qualify for the full pension of £72.50 a week. It's a long time, isn't it, for not a lot at the end of it? If you haven't worked for the full 44 years, your pension is reduced proportionately. And if you've worked for less than 11 years, you get zilch! (The rules are slightly different for women but are being changed to bring them in line with the rules for men.)

There are obviously certain times in your life when you're not working for a good reason and the Government will let you off in those instances. For example you'll be credited as if you've paid the contributions if you're sick or you're raising a child. But if you haven't paid enough because you've spent half your life back-packing around the world, you are allowed to make extra contributions later if you need to.

Not many make our own provision for our old age so it's important to check that you're up-to-date with your NICs to ensure that you'll get at least something when you hit 65. You can do this by asking for a pension forecast. It takes about five or six weeks to come through but it'll tell you if you ought to pay a bit extra to catch up.

There's more on NI contributions here: and, if you're wondering whether you need to sort out a proper pension, you can find out how to do it here.

More: The Fool's Pension Centre