National Insurance Scams part 2
It ain't just foreigners scamming...
I argued recently that the UK government should make it much harder for foreigners, who have lived and worked here briefly, to claim a full UK state pension, by making relatively small additional National Insurance contributions.
I thought this was a niche issue, but lots of people have got in touch to tell me that this is widespread. Hopefully the government is listening, will do something about it, and will stop the rest of us having to pay out for foreigners’ pensions.
But readers also told me about a related issue that costs us all a lot more. Just as foreigners living abroad can buy extra years of national insurance, so can UK citizens living abroad, whether or not they plan to retire to the UK or remain abroad.
It really is a lucrative deal. Such people have to pay £925 to buy a year of national insurance, with 35 years needed for a full pension. An annuity equivalent of the state pension costs just over £200,000. Making £925 a year into £200,000 is an interest rate of over 9% plus inflation. A real interest rate of 9% is the deal of the century - and a terrible deal for the rest of us.1
Of course it is even better/worse than that, because the pension will rise in line with the triple lock, not just inflation.
Remember that this deal is only available to people who have decided to live abroad, and pay their taxes abroad. Why on earth would the UK government want to give a sweetheart deal to British people who decide not to live here, not to contribute to the UK economy, and not to pay tax here? I can’t think of a single good reason. It is a loophole.
Again, I am told that this is common. One reader told me of a hedge fund friend of theirs, living in the Cayman Islands, who assured them that “everyone does this, why wouldn’t they?” Why indeed - no hedge fund can return 9% real rate of return with (virtually) no risk.
So here are three policy solutions.