Self-Employed to Benefit from Pension Reform

15 - 01 - 2013

The self-employed will be ‘unequivocally better off in the long run’ thanks to a new flat-rate state pension, according to Paul Johnson, director of the Institute For Fiscal Studies (IFS).

Currently, there are two state pensions in Britain. The first is a basic state pension based on 30 years of National Insurance contributions and the second is a state earnings-related pension called the State Second Pension.

The new pension scheme, which was outlined in a White Paper on Monday and is likely to come into force in April 2017, will merge the state second pension with the basic state pension, to create one flat-rate payment.

According to the Department of Work and Pensions (DWP), 4.2 million self-employed people are prevented from getting a full state pension under the current system. However, the new single tier system will mean that millions of self-employed workers will be entitled to the full state pension for the first time.

Under the current scheme, recipients get a basic pension of £107 with additional means-tested top-ups. From April 2017, pension payments will go up to a flat-rate payment of £144 a week.

However, people will have to make 35 years’ worth of National Insurance contributions, instead of the current 30, to be entitled to the full pension.
Anyone who qualifies for their pension before April 2017 will receive their entitlements under the current system.
‘Much-needed shake-up’

Joanne Segars, chief executive of the National Association of Pension Funds, supports the simplification of the pension system.

‘Today’s announcement for a simpler, more generous state pension is a much-needed shake-up that will ultimately help millions of pensioners and savers. For the first time in a generation, people will know that it pays to save, and that whatever they put aside won’t be eroded by means-testing when they retire,’ she said.
‘Complex pattern of winners and losers’

However, not everyone will benefit from the reform. Those entering the workforce now are likely to receive less than they would have under the current system.

Rowena Crawford, senior research economist at the IFS, acknowledged that proposed scheme is not all good news but noted the equality the reform will bring for the self-employed.

‘While there will be a fairly complex pattern of winners and losers from the reform in the short-term, the main effect in the long run will be to reduce pensions for the vast majority of people, while increasing rights for some particular groups – most notably the self-employed,’ she said.






Foremans LLP Umberlla
Foremans LLP