Pension changes to benefit self-employed

Wednesday 19 August 2015

The government has launched a new band of National Insurance contributions, known as Class 3A, that is intended to make sure self-employed people and women currently in their early sixties are supported in their bid to qualify for the full state pension.

Under the new system, those who reach pensionable age will be able to claim a weekly payment of £155.95, which will be made up of £115 basic rate, and any second state pension (Serps) they are entitled to. The new payment system will take effect from April 6th next year, and is part of a two-year programme of reforms, which has included raising the pensionable age of both men and women.

However, two groups who often do not qualify for the full rate are women and the self-employed. Older women have often paid a lower rate of National Insurance, which was called the married women’s stamp. This prevents them from being entitled to Serps, which they would be if they had been born as little as a few months later. Self-employed people are also able to pay a lower rate of National Insurance, which may prevent them from claiming the full amount of Serps.

While those still in work can choose to pay additional National Insurance so that they can qualify, many of those who have already retired may be penalised by the changes.

To help these people avoid missing out on extra money in their retirement, the Class 3A top-up payment has been introduced. For a one-off payment, individuals who would not otherwise qualify for Serps can now receive a more substantial amount on a weekly basis once they retire.

People over the age of 65 will be able to pay £890 to add £1 per week to their pension. This falls to £779 for over-70s, £674 for over-75s, and £127 for those who have made it to 100. For over-65s who want to claim the full £25 extra per week, the one-off payment will be £22,500.

Like annuities, the top-up payments can be something of a gamble, as you need to live long enough to get more out than you pay in. However, many people like the certainty of a guaranteed income in their old age. Either way, a greater range of options for contractors planning for their future is likely to be welcome.

However, younger contractors who want to secure as much state pension as possible should also consider the possibility of paying a higher rate of National Insurance now, to make sure that they are provided for when they retire.

The Class 3A payments will become available from October 12th.

By Victoria McDonnell

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