A single-tier pension: what does it really mean? - The Institute For ...
A single-tier pension: what does it really mean? - The Institute For ...
A single-tier pension: what does it really mean? - The Institute For ...
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A <strong>single</strong>-<strong>tier</strong> <strong>pension</strong>: <strong>what</strong> <strong>does</strong> <strong>it</strong> <strong>really</strong> <strong>mean</strong>?<br />
5.3 <strong>The</strong> self-employed<br />
<strong>The</strong> self-employed are one of the few groups that, in the long run, will be able to<br />
accrue ent<strong>it</strong>lement to a greater state <strong>pension</strong> under the proposed <strong>pension</strong> system<br />
than under the current one. As described in Table 2.1, under the current system<br />
self-employed individuals accrue ent<strong>it</strong>lement to only the BSP, and not the S2P, for<br />
each year in which they make class 2 NI contributions. This <strong>mean</strong>s that a selfemployed<br />
individual in 2016–17, for example, would accrue £3.63 of BSP under<br />
the current system, compared w<strong>it</strong>h £4.18 under the proposed system. <strong>The</strong>refore,<br />
all other things being equal, (long-term) self-employed individuals would gain<br />
significantly from the proposed reforms. This is demonstrated by the example of<br />
James in Box 5.1.<br />
However, there are two caveats to this statement to bear in mind. First, selfemployed<br />
individuals currently pay lower NI contributions to reflect the fact that<br />
they receive lower benef<strong>it</strong>s from the state. 59 If the government decides to<br />
increase NI contributions for self-employed people alongside the changes to the<br />
state <strong>pension</strong> system, then the self-employed may not gain to the same extent as<br />
just suggested (or, indeed, at all). As the government brings benef<strong>it</strong>s for the selfemployed<br />
in line w<strong>it</strong>h those for the employed – addressing an inequal<strong>it</strong>y between<br />
the two groups that has existed for decades – <strong>it</strong> would seem to make sense also to<br />
equalise their contributions.<br />
Second, individuals rarely spend their entire working lives in self-employment –<br />
they are likely instead to have some periods of employment and/or other<br />
activ<strong>it</strong>ies (such as caring for children) that earn ent<strong>it</strong>lement to S2P. 60 <strong>The</strong>refore,<br />
currently self-employed individuals could lose out from the proposed reform. <strong>For</strong><br />
example, an individual born in 1986 (starting working life in 2002) might only<br />
need to spend 31 years engaged in other cred<strong>it</strong>able activ<strong>it</strong>ies or earning at the<br />
LEL (out of 52 potential years of working life) to have a lower total stream of<br />
<strong>pension</strong> income in retirement under the proposed <strong>pension</strong> than under the<br />
current system. 61 <strong>The</strong>y could, therefore, spend at least 40% of their working life<br />
in self-employment and still not gain from the proposed reform.<br />
59 HM Revenue and Customs estimates the net cost to the government of reduced NI contributions<br />
for the self-employed was £1.6 billion in 2012–13. See<br />
http://www.hmrc.gov.uk/statistics/expend<strong>it</strong>ures/table1-5.pdf.<br />
60 Of our core (representative) ELSA sample born 1945–1952, 21% have spent any years between<br />
1975 and 2003 in self-employment (32% of men and 12% of women). This group of individuals<br />
w<strong>it</strong>h any self-employment has spent an average of 16 years in self-employment (out of a<br />
maximum of 29) and an average of 15 years w<strong>it</strong>h pos<strong>it</strong>ive employment earnings.<br />
61 This is based on comparing the present discounted value of the state <strong>pension</strong> income stream<br />
under the current and proposed systems, assuming that the individual lives to age 90 (which is the<br />
ONS’s latest, period-based, estimate of life expectancy for individuals born in 1986). Our<br />
calculation assumes that the BSP and proposed <strong>single</strong>-<strong>tier</strong> <strong>pension</strong> are uprated in line w<strong>it</strong>h<br />
earnings.<br />
54