Giving the self-employed their “pensions due”.

The budget announcement of a phased 2% increase in Class 4 National Insurance Contributions (NIC)s was generally considered bad politics but could it be good policy?

In pension circles, any changes to NICs are regarded as interesting. They fund the activities of the DWP and especially the pay as you go state pension system.

But NICs have also been used in the past to fund earning related pension benefits, notably SERPS- which in its latter days we knew as S2P or the State Second Pension.

Since the advent of a single state pension in April 2016, all state pensions are paid as a single state pension and this has meant a lot of jiggery-pokery around state pension ages, contracting out deductions and there have been losers.

The most notable losers are women of a certain age who have found themselves on the wrong side of a cliff-edge with their retirement pushed back relative to luckier age-groups. These are the WASPI women and they are a testament to what can happen if an unfunded pension system based on a complicated formula – goes wrong,


Some time ago, the Government decided that top-up pensions for those mainly dependent on state pensions in retirement, were best provided through private funded arrangements we now know as workplace pensions. This shift manifested itself in auto-enrolment which took advantage of developments in payroll technology to establish a national system of saving which we are in the middle of implementing.

But it soon became apparent that auto-enrolment would not have total coverage of all workers, many people earn too little and many (to borrow from the railways) have the wrong kind of earnings.

The high levels of employment we see today include a massive surge over the past ten years in those working as self-employed. This has been termed the rise of the “gig-economy” where people work for an organisation as each job was a gig. Infact there are an army of flexible workers who choose how and when they do their work as their own bosses.

These new self-employed do not appear on payroll, do not pay tax as they earn and do not pay pension contributions under auto-enrolment. It is estimated they represent 6m workers. Understandably the Government is concerned about this phenomenon! The Treasury worry they are not contributing sufficient to support the economy (and our substantial debt). The DWP worry that they are not feathering their retirement nest and are in danger of becoming a burden on the state.

Big Government, the number 10 policy unit, has initiated two enquiries into the self-employed. One is Chaired by the head of the Royal Society of the Arts – Matthew Taylor and is looking at the working conditions, earnings and benefits of the “gig economy”. The second is the auto-enrolment review which has been put in the charge of a group of pension worthies and is currently seeking views on what needs to change to keep the positive momentum of the last four years – going!

 

One of the most remarkable things to happen to retirement saving in those years has been the collapse of saving among the self-employed. This graph shows how as self-employed numbers have grown, self-employed pension savings have fallen

self-employed

Source Aviva.

The reasons for this decline in saving are various. Historically the self-employed were sold to by aggressive commission only personal pension “advisers”. When commission was abolished in 2013, the selling stopped and purchasing decreased. The new self-employed have had many things on their mind but pensions have clearly not been one of them!

Pensions people who are concerned about adequate coverage across all parts of the workforce have become alarmed about this lack of saving. Sir Steve Webb, a former pension minister has argued that the best way to include the self-employed in the saving revolution is through an opt-out of the national insurance system.

By a spooky coincidence, he called on Government this time last year, to increase class 4 national insurance with an opt-out clause enabling the self-employed to pay the increased NICs into a workplace pension. This idea has sat on the back-burner until the budget’s announcement of a phased increase in Class 4 NICs for the self-employed!

We now know that the changes in NICs will not be set before parliament till the autumn. In the meantime, the Government will be considering the implications of Matthew Taylor’s work and of the auto-enrolment review. Could the delay mean that the self-employed will take a step closer to employment and be introduced to the world of auto-enrolment and workplace pensions?

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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