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Will I be affected by the pension reform?

24 January 2013 One Comment

pensionreformWhile young people generally don’t consider pensions, many wish they would have look at them when they were in this age group.

The proposed state pension reforms have been the talk of the town for some time now, but for many people they’re still much too confusing.

Pensions can seem baffling at the best of times, so overhauling the entire system is bound to leave many people feeling out of their depth. The one certainty to come out of the reforms though is that the self-employed will be better off for it.

How is that possible?

In the past, self-employed people didn’t make enough National Insurance Contributions (NICs) to get the full state pension amount.

The amount of National Insurance (NI) you actually pay is dependent on your income. To give you an idea of how much less you could accrue through NICs as a freelancer, consider these numbers:

–          Class 1 NICs

You will only be eligible for these NICs if you are employed by a larger company.

If you earn between £146 and £817 a week you will pay 12% of your weekly earnings. If you earn more than £817 per week you have to pay an additional 2% in NICS.

–          Class 2 NICs

This type of NIC is only available to the self-employed.

If you earn less than £5,315 a year from your freelance work you can opt out of paying NICs altogether. This means that you aren’t eligible for any government benefits if you fall ill and can’t work though. If you choose to pay NICs still, you are charged at a flat rate of £2.65 a week.

–          Class 4 National Insurance Contributions

Self-employed individuals that earn between £7,605 and £42,475 per year are taxed at a rate of 9%. If you earn more than £42,475 you will be charged an extra 2% on top of that.

–          Class 3 National Insurance Contributions

If your NICs record has a few gaps, either because you opted out of paying or you were out of work, you can pay voluntary class 3 NICs. This amounts to a flat rate of £13.25 a week. As you can see, the current laws mean that being self-employed barely gives you a chance to accrue a state pension.

 

The times they are a-changin’

The new pension laws will give everyone a flat-rate pension. The changes have been proposed because the current system is simply too confusing, and people aren’t saving enough for their future.

The changes will benefit the self-employed the most, along with women that have spent most of their lives caring for their family rather than working. Those that fall into this bracket currently only receive around £97.65 per week in state pension, but it will be increased to an estimated £140 per week in today’s money.

Am I eligible?

The proposed plan isn’t coming into action until 2017. If you are currently of State Pension Age (SPA) or will hit it before 2017 you will remain on the current pension scheme. If not though, you will be eligible for the new state pension plan.

Is that a good thing?

Those working in full-time employment may not see the changes as a good thing, as it’ll cause their NICs to go up and mean they receive less money in the here and now. The state pension age will also be increasing, as people are living longer. However, freelancers will finally get a good deal from the government in terms of the full amount of their state pension and so it is definitely a good thing for them.

The pension reform comes with many pros and cons, but if you’re a freelancer you should take it as a light at the end of the retirement tunnel.

This article was provided by Aurora Johnson on behalf of Nixon Williams, a freelance accountant providing advice and assistance in a number of areas, including IR35 guidance.

Image courtesy of Shutterstock.

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