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A budget for the self-employed

DIY Investor
February 18, 2016

The Chancellor has a record of springing pension surprises in the Budget, but just suppose for a moment that the reports are true and that George Osborne plans to abolish the top rates of tax relief on pension contributions and move to a flat rate for everyone somewhere between 25 per cent and 33 per cent. That would divert public spending from the highest earners, who now receive tax relief at 40 or 45 per cent, while increasing support for the lower paid, who face the biggest risk of poverty in old age.

This would be welcome. For a start, it would show enlightened self-interest by the government (on behalf of future taxpayers) if the less well-off end up more able to support themselves in later life. Second, together with mandatory employer contributions to the new workplace pensions, it will give an extra leg-up to people saving into them.

But there’s an important point that some might miss. By changing the state’s contribution so that it is no longer pegged to income tax rates, the Chancellor would be turning a tax relief into a subsidy. This would immediately benefit those on lower incomes (and our children, who have no earnings but do have self-invested personal pensions that qualify for tax relief). But as a subsidy not pegged to tax rates, it is open to change on the whim of future chancellors—hardly a recipe for the end of tinkering with pension rules.

And from my perspective there’s another issue. What about the self-employed? We are a growing portion of the workforce (now more than 14 per cent) that even before this change have less incentive to save into a pension because we have no employer to chip in. I stopped contributing when I left full-time employment due to lack of employer contributions and the fact that I would be obliged to spend my savings on an annuity. The annuity problem has already been removed and if we now have certainty over how much the government is going to put in, that will probably push me back into pension saving again.

But I will still have to save more than if I were employed to reach the same size of pension fund, due to the lack of employer contributions; and I will still need to deal with the other uncertainties of self-employment. Don’t get me wrong, I chose self-employment and I accept the consequences. My point, rather, is that I would find it easier to save more if I had better ways of covering some of the risks that I face, having left the world of employment. This is a job for insurers, not the government.

The issue is that I need to carry a larger sum in cash to cushion a sudden loss of income than someone who is an employee. This means I’m a bit less inclined to lock up money in a pension that I can’t get at in an emergency. At the same time, the existing insurance products for things like income protection and critical illness cover are too expensive and inflexible.

What I want is a cheap, flexible insurance policy that will let me cover whatever percentage of my income for whatever period I feel is necessary (say, 80 per cent of my average income over the past three years for periods of up to two years). This would let me deal with my risks in a flexible way, and increase my willingness to save into a pension. Luckily, big insurers are working on products like these, so there may well be some good news on the way. What can the government do to help? I would like to see regulation make it as easy as possible for insurers to offer these policies, and I would like the premiums to be a tax-deductible business expense. Is that too much to hope for?