OpinionApr 21 2016

Self-employed facing Class war

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The self-employed now stand on an equal pension footing with employed people after years of being treated as second-class citizens by being excluded from the various top-up schemes.

But there is a dark underbelly to these reforms which could see some of the lowest earners facing a 400 per cent increase in their National Insurance payments or losing their right to the state pension altogether.

These people may not be directly on your radar but they may well include the wives, husbands, sons or daughters of clients.

The dangers lurk two years down the line when Class 2 National Insurance will be abolished.

Class 2 NI was, until last year, a simple system. The self-employed paid £2.80 per week, usually collected by a monthly direct debit, and this allowed them to build a state pension.

Only those with profits over £5,965 per year were compelled to pay, but those with smaller profits could pay voluntarily.

Last year, in a supposed simplification, the Government decided that Class 2 would be collected with end-of-year taxes.

That is fine if you pay tax, but those with very small incomes now have to make special arrangements.

But worse is to come. From April 2018 Class 2 NI will be abolished.

A consultation paper, now closed, suggests that Class 4 NI can be reformed to plug the gap.

Class 4 NI is charged at 9 per cent on profits of between £8,060 and £43,000 per year – but it does not provide any entitlement to contributory benefits.

The intention is to introduce a new zero rate at the small profits threshold of around £6,000 and make this the level for building qualifying years for the state pension.

So far, so good. But then it gets nasty. A number of groups could fall through the net.

They include those with multiple sources of small earnings. For example, someone earning £3,000 a year from a part-time job and £5,000 from self-employment would not build up entitlement to the state pension.

Similarly, someone who falls ill part way through the year, so finishes with small profits, can continue to pay Class 2, but may not qualify once this is abolished.

And those with very low profits who currently pay Class 2 voluntarily would also be cut adrift.

So what is the solution? Those with profits below £6,000 could, it is suggested, build qualifying years through paying Class 1 insurance through employed earnings. This sounds speculative, to say the least.

For others, such as parents of children under 12, there will be credits. But for many, the only option being offered at present is that they pay Class 3 voluntary NI.

This is £14.10 a week – a 400 per cent increase on the £2.80 currently paid. This would be an enormous and entirely unjustifiable attack on those with tiny incomes.

This surely cannot be allowed to happen, but at the moment that is precisely what appears to be on the cards.

There is a dark underbelly to these NI reforms Tony Hazell

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Pity the Equitable Life remnants

When I read about Equitable Life raising fees to 77,000 customers I was deeply shocked. Did so many people still have money there?

Let us not call them investors, because much of the money held with Equitable Life feels more like a donation to salaries and fees.

Apparently, the money it pulls in from charges no longer covers running costs of the shrinking business.

Perhaps the worst affected are those who were holding cash in the old deposit fund with no annual charge. They will now pay 0.5 per cent a year as their savings are moved to the Money Fund, which has earned nothing over the past three years.

No doubt more will be prompted to leave, and as the cash available shrinks, fees will have to rise again.

Which leaves the intriguing prospect that the last person left may need to fund chief executive Chris Wiscarson’s £555,020 annual package all on their own.

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Equity release taking liberties

Equity release is a product that desperately needs modernising. This is only likely to happen with increased competition, which itself may require a review of regulation.

It will be interesting to see what the Prudential Regulation Authority comes up with following its discussion paper looking at lifetime mortgage valuations, capital treatment and risk management.

Any move to reduce perceived risk to lenders may inevitably lead to more risk being loaded on to borrowers, smaller loans or, dare I suggest, even higher interest rates.

On the other hand, if more lenders can be encouraged into the market we may see much-needed innovation and an increase in the flexibility of these loans.