Contractors ‘are winners of state pension changes’

Scrapping means-testing in favour of introducing a flat rate, basic state pension of £140-a-week, as the government intends, will markedly improve a self-employed person’s retirement nest egg.

Welcoming the proposal, announced by pensions minister Steve Webb in a green paper, advisors to the self-employed said it should result in more money and less unfairness for their clients.

At present, the means-tested system means a self-employed person’s state benefits can be scaled back in proportion to any private pension income received, particularly if they are low earners making only modest contributions.

Experts at Brookson, an accountancy provider to the self-employed, confirmed that the current system puts freelance and contract workers at a “disadvantage” – equating to about £26 a week due to their smaller national insurance bill.

“This announcement by the government is a step in the right direction,” said Hamish McDougall, managing director of Brookson Financial Services.

“Means testing hurts the self-employed and meant that the system was too complicated, especially for freelancers and contractors who tend to pay National Insurance but don’t currently qualify for the state second pension element of the present system.”

Under the proposal, the self-employed will get an extra £4.66 of pension a week for every year of NICs they make for up to 30 years, returning a retirement pot of about £140, up from the current £97.65.

As well as the increase, the self-employed will also be pleased at the reform because it will lighten their administrative burden while ensuring that, in future, they will be treated equally by the pensions system, said Contractor Money.

Brookson adds it should also reduce bureaucracy for the end-user or end-client, but reminded that the age-old challenge for all non-permanent workers of trying to save for retirement remains the same.

“With freelancers still finding it hard to commit to a regular savings regime, provision still needs to be made for retirement, regardless of changes to the state pension,” the firm explained.

“The government is taking away the uncertainty over how much state pension freelancers and contractors will receive; yet these self employed professionals still need to plan better to ensure they are saving for retirement.”  

Another pensions advisor said that, although it won’t come into effect until 2015, the reform means people without a full NI record and those without full rights to state pensions will, rightly, no longer be penalised.

But Unison, the union, condemned the flat rate proposal, saying £140 a week at today’s prices is “way below the poverty line and a hike in national insurance contributions will see workers struggle to save for their retirement.”

It also criticised the green paper’s announcing that the age at which people receive the state pension will increase to 66, warning it “will hit many workers across the public and private sector who do very physically demanding jobs.”

In line with the criticism, Rachel Reeves, the shadow pensions minister, said: "The government is very keen to talk about the winners from this reform, but if it is going to be cost neutral, as they say, there will be losers."

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