Self employed should be allowed to divert NI rise into retirement fund argue pension experts

10th March 2017

The self employed should be allowed to divert at least some of the planned National Insurance rise into their own private pension provision to put them on an equal footing with employees who have access to workplace pensions and contributions, experts have said.

As the Government grapples with demands from Conservative backbench MPs to rethink the NI rise and concedes that legislation will not be brought forward until the autumn, the pension industry says the opportunity should be taken to boost retirement provision among the self employed.

On plans set out in the Budget, national insurance class four contributions will rise from 9% to 10% from 2018 and from 10% to 11% in 2019.

With the Government under fire for bringing in the change, pension experts are now saying that the self employed could be incentivised to contribute to their pensions by allowing them to divert some of the rise into a retirement fund.

The current auto-enrolment system is being rolled out to all employers and employees. Employers must currently contribute 1% but this rises to 3% in the next few years, provided employees contribute to a pension and do not opt out. By definition such a system cannot apply to the self employed.

Steven Cameron, pensions director at Aegon said: “The increase in Class 4 NI contribution rates for the self-employed is being justified on grounds of them now being entitled to the same state pension as employees. But while state pensions have been brought together, the self-employed remain second class pensions citizens. Unlike employees, they are not benefitting from being automatically enrolled into a pension, with the added benefit of a valuable employer contribution. With growing numbers of self-employed, this rift needs to be tackled if we’re to avoid huge future disparities in retirement incomes between them and their employee peers.

“With pressure mounting and growing calls for a U-turn, the Chancellor could think about softening the blow by agreeing to contribute some of the increase in NI contributions into a private pension of the individual’s choice. This would mean self-employed and gig economy workers immediately had funds in their own pension, a powerful kick-start which they could then contribute more to themselves. The Chancellor would have to sacrifice some of the extra revenue he was hoping for today, but longer term, self-employed retirees would be more likely to have an adequate income from state and private pension combined.

“This is not unlike the ‘contracting out’ system the Government used to offer under which individuals or their employer could choose to receive a rebate in NI contributions to be paid into a private or workplace pension.”

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