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Pensions for the self-employed

Pensions for the self-employed have always been a conundrum,

particularly state pensions. At one end of the sector are the

high-earning professionals such as accountants and solicitors working

as sole-proprietors or partners. And at the other end are the low to

modest-earning home-workers, subcontractors or small business owners.

All are entitled to the basic state pension on retirement but not the

earnings-related part of the state scheme (Serps). Only employed

people are entitled to Serps. That is not a great problem for the

high-earning self-employed because they have the resources to provide

for themselves and top up their basic state pension. The rest of the

self-employed, however, have to survive on low incomes in retirement

as well as during their working lives.

Low cost, flexible stakeholder pensions are available to the

self-employed but, as we have seen with employed people, pensions in

retirement are not a priority for those with little disposable income.

The Government, in its pensions Green Paper – A new contract for

welfare: Partnership in Pensions, asked the Pension Provision Group

(PPG) to look at a number of topics including pension provision for

the selfemployed.

That PPG has now reported, concluding that periods of self-employment

should count for the purposes of the State second pension (which will

replace Serps from April 2002) on a compulsory basis but not until

S2P moves from an earnings-related pension to a flat-rate pension in

2006. Compulsory pension cover for the self-employed would be on the

same basis as for employees (but with the ability to contract out of


“Compulsion” for pensions is not a new concept: we already have it

today in the form of NI contributions. S2P for the self-employed

would result in greater compulsion.

The PPG report contains useful information on the characteristics of

the self-employed, including patterns of movement between employment

and self-employment, earnings bands and contributions invested in

pensions today.

It also highlights the rise in the “new self-employed” – those

engaged mainly in low and high-value service activities.

Self-employment has expanded from around two million in 1981, 8 per

cent of those working, to 3.2 million in 1999, 12 per cent of those


The PPG did not make any recommendations on how to pay for this extra

state pension for the self-employed. This is unfortunate if

understandable given the difficulty in comparing two different


Currently there is a significant difference in NI contributions for

employees and the self-employed. The latter pay a flat rate class 2

contribution of £2 a week and a class 4 contribution of 7 per

cent of profits between £4,535 and £29,900 a year.

Employees pay 10 per cent of earnings between £ 87 a week and

£ 575 a week and their employers pay 11.9 per cent of earnings

above £387 a week.

NI contributions for a self-employed person earning £29,900

would be £ 1,879.55 a year and for an employed person would be

£5,557.34. The problem is that these two figures are not really

compar-able because the benefits are different.

For example, the self-emp-loyed are not entitled to unemployment

benefit. It is also questionable whether NI contributions pay for

state benefits. They are not hypothecated. NI for the self-employed

is ass-essed and collected alongside tax. Is this not simply tax by

another name?

Even allowing for the differences in benefits enjoyed by the

self-employed and the employed, the deductions (to use a neutral

word) are significant. A reduction in deductions is out of the

question for employed people. Rather, a lifting or removal of the

upper earnings limit leading to bigger deductions for employees is

more likely.

So that leaves an increase in deductions for the self-employed as

inevitable. The high-earning end of the self-employed spectrum will

see an increase in NI as a tax increase, even if this is accompanied

by the facility to contract out the S2P and re-route the increase

into personal pensions.

The other end will be attracted to the prospect of a higher state

pension, even though it is likely to be means-tested through a credit

system. However, they may find that the increased NI could be

crippling and their objections could be just as vocal.

Clearly, any increase in NI for the selfemployed will have to be

introduced gradually over a period of years. The issue is a complex

one and will only be resolved politically, which is probably why the

PPG steered clear. Who&#39d be a politician?


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