In a competitive field, ‘National Insurance’ might be the single most unhelpful example of money-related terminology.

The name evokes the early days of the welfare state in Britain, although it existed in a different form before that, and unlike other money we pay to the government - income tax, for example - it gives the strong impression that if you pay National Insurance, you’ll get something definite back in return when you need it - just like other types of insurance.

In particular, you’ll get your state pension when you retire, as though the NI money you’ve seen disappearing from your wages all these years has been set aside in a pot with your name on it, ready for when you quit work.

In reality, National Insurance does not work like this. Rather, the money paid in National Insurance by both individuals and employers goes into a fund from which most of it is immediately paid out to pay the pensions, and some other benefits, of those who presently need it.

If more money is being contributed than is being paid out the fund runs a surplus, but there are times when this dwindles and the government of the day has to pump in more. In the past, the trigger for this cash injection has been when the NI surplus falls to below 1/6 of its annual expenditure. At that point, the government can pay in an amount worth up to 17% of the benefits paid to top it up.

These numbers are kept track of by the Government Actuary’s Department (GAD), which this week gave a gloomy update on the state of the fund’s finances. The fund is currently in surplus of about a 1/5 of expenditure, the GAD said, and this surplus will keep growing until about 2025.

At that point, however, the surplus slams into reverse and is eaten away completely by around 2032, meaning anyone under about 50 years old now could face a serious squeeze on their state pension. What’s more, even if the government were to make the maximum cash injections allowed, they would be insufficient to keep the fund above the 1/6-of-expenditure danger level in most years from 2040 onwards.

The story these figures tell is of a system struggling to keep pace with demographic changes to our society. There is an unusually populous generation that is reaching the end of their working lives - the baby boomers. The NI contributions of this large group have easily covered the benefits paid to the less populous generations that preceded them. Soon, however, they themselves will have to be paid for.

On top of that, life expectancy continues to rise so these people will need a state pension for longer, adding even more strain to the system.

It all means that something has to give. Either the government will have to change the rules and pay in more to the fund, or else the benefits paid out by the fund will have to be reduced from what’s currently planned.

It underlines how, in general, tomorrow’s retirees will not be able to rely on help from the state that today’s retirees have enjoyed. Either they’ll get less, or they’ll have to pay in more to get the same.

Providing your own retirement income will become increasingly important and saving inside a pension is how to do it. If you are already in a workplace pension increasing your contributions is an easy way to boost your pension savings as everything is taken care of for you by your employer and pension provider. You should also try to contribute whatever it takes to get the maximum employer contribution (some employers for example will match your contributions up to a certain level). If you want to see the difference increasing your contributions by even just 1% could make to your position at retirement, use our power of small amounts tool. Finally, if don’t have access to a workplace pension, investing in a self-invested personal pension (SIPP) could be a good alternative.

Our Pensions Service Centre team will be happy to talk through any aspect of your Fidelity Workplace Pension with you, including how you may be able to increase your contributions.

The Pensions Advisory Service offers free, independent and impartial information and guidance to people with workplace and personal pensions on all pension matters at

Important Information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. You should regularly review your investment objectives and choices and if you are unsure whether an investment is suitable for you, you should contact an authorised financial adviser.