Pensions for the self employed
The self-employed — partners, prinO, pals, etc — are not properly catefe.; for in state pension schemes. They vo be able to look only to the basic stint pension at retirement unless the) make their own private arrangement for a pension. They will not be ifl cluded in the new State Reserv! Scheme, on the grounds of the dial.' culty of collecting earnings-related contributions from them.
It is most unwise for anyone in •titi5 position to rely solely on the basic state scheme, since it is clear that, des' pite regular increases to keep pae1 with inflation in the future, it will al' ways hover at around the subsistence level. Fortunately, there are ways making private pension arrangement with insurance companies. There are, useful tax advantages to be gained from these arrangements, and in re, cent years a number of improvements, have been introduced as a result 01 legislation. Now, up to 15 per cent of net rele. vant earnings can be contributed tn"
wards a pension contract, free from all tax, each year, with an overall limit of £1,500 per annum. Effectively, therefore, this means that anyone earning up to £10,000 a year can put 15 per cent of earnings towards a pension, completely free from tax. Incidentally, higher limits, on a sliding scale, apply for anyone born in 1915 or earlier.
One of the reasons why this form of saving for a pension is likely to score. over most other methods is because the contributions which one pays over to the insurance company accumulate free of tax in its fund.
There is considerable flexibility with this type of contract. For instance, to allow people to pay the full amount each year, a contribution can be made and rank for relief in a tax year up to six months after that year's earnings have been agreed with the Inspector of Taxes.
Once money has been paid into this type of contraa, it cannot be withdrawn in any way until retirement — except in the case of one's death. For this reason, the contract with the insurance company (unlike an endowment or whole life assurance policy) cannot be used as security for a loan.
One of the more recent improvements allowed by the Government is that, when the pension starts to be drawn, part of it can be exchanged for a tax-free cash sum. It is up to the insurance company to decide how much pension must be given up for a specific amount of cash, and it is a statutory requirement that the taxfree cash taken in this way must not exceed three times the annual pension which will be paid after this withdrawal.
Even if you do not really need a capital sum at retirement, but would prefer to have the highest possible income during retirement, almost certainly it will pay to take the maximum amount of tax-free cash, because the cash can be used to purchase an annuity from whichever insurance company happens to be offering the best terms at the time. Apart from the fact that it may be possible to obtain a better yield in this way, there will be an important tax advantage. Whereas the whole of the pension from the pension policy will be taxable, only a proportion of the benefits from an immediate annuity are taxable — dependent on age, sex and the type of annuity. There is a wide choice of different policies on the market, and there is no need to be committed to one contract until retirement. Many contracts allow for ' single premiums ' to be paid. This means that you simply pay one premium to secure benefits under the terms of the contract. Next year, you might be attracted by a policy being offered by another company, and could pay a single premium towards it. You can even pay premiums towards two or more different contracts in the same year — provided, of course, your total contributions do not exceed the limits mentioned above. Sometimes, for instance. it can be convenient to have one contract to which regular premiums are paid, and to 'top up ' this contribution by paying a single premium to another policy — so as to make
Theat° July 28, 1973 sure Sfaet etthe furl I 15 per cent of earnings is contributed each year in one way or another.
In the event of your death before retirement, normally there will be a full return of premiums (with or without interest as agreed). Or, some unitlinked policies pay out the value of the units standing to the credit of the policy at the time. In this case, an appreciable capital sum could be involved, bearing in mind that the investments accumulate free of tax.
Apart from that, it is possible to arrange for a pension for a dependant after your death, and there is the advantage that the value of this pension would not be included in your estate for duty purposes.
The premium for this protection can be paid from gross earnings, but must not exceed 5 per cent of earnings and must be included in the overall figure of 15 per cent. Making these arrangements, therefore, will reduce the pension due to you provided you survive to retirement..
When a pension is drawn at retirement, either it can be guaranteed for, say five years even if you should die before then, or it can be paid for the joint lifetime of husband and wife and, when one dies, for the lifetime of the survivor.
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