National Insurance Fund

The National Insurance Scheme, set up by the British Governemnt following World War II, was designed as a universal insurance system for all British people. Originally it was to be called the “Social Insurance Scheme” but the name was changed when the bill was being considered.

The funds are held in the National Insurance Fund (NIF), separate from Consolidated Reveue. Contributions are not "taxes" because they are not available for general expenditure by the government

Contrary to what many believe, the National Insurance Fund is not absorbed into general revenue. The NIF has a distinct existence.

Here is an extract from a recent exchange with the National Audit Office.

Q. Would you please confirm that the NIF exists as a fund quite distinct from ‘other public money’, that is, the Consolidated Fund.

A. Both the National Insurance Fund and the Consolidated Fund are distinct legal entities. Separate accounts are prepared for both Funds and presented to Parliament. All surplus funds are retained in the National Insurance Fund.

The income of the NIF consists of contributions from employees, employers, and the self-employed PLUS interest on its investments.

The NIF is used to pay for social security benefits such as retirement pensions, but not for the means tested Minimum Income Guarantee and Tax Credits. All British State pensions are paid out of the NIF, whether to pensioners living in the UK or any overseas country.

Each year there is a surplus of the order of 2 billion pounds. The accrued surplus is currently more than 30 billion pounds. The surplus is lent to the government by way of investment in gilt-edged securities, and interest on these investments is paid to the NIF as it falls due.

By the current government’s “golden rule” borrowed money (which includes the NIF surplus) cannot be used to finance current expenditure. It can only be used for investment, mainly capital investment in infrastructure. The money in the NIF can only be used for payment of benefits and administration expenses.

The NIF has a surplus of over £34 billion as at 2005/06 and the Government Actuary Department forecasts that this surplus will grow to over £74 billion by 2012.

Levels of benefit and contributions are set following the advice of the Government Actuary, and are designed to keep a healthy balance in the fund. It was never intended that the Fund should increase to these high levels. The government says that it needs the investments of the NIF to pay for such socially useful things as schools and hospitals. As there are many other organisations and institutions ready and eager to invest in gilts, there is no need to retain the investments of the NIF in this way. Pensioners regard this as a “stealth” tax, because there are no plans to return the surplus fuinds in the form of additional benefits. Perhaps in time the new inflation index and the new rules for acquiring a pension, particularly for women, will enable pensioners to get some reward for the time this money has been locked up.

See http://www.britishpensions.org.au/national_insurance_fund.htm for full explanation and link to the document with the full Q&A session with NAO.