National insurance, not working but where do I fit in

happyhero

Hi can anybody advise me. I got made redundant back in October and have been buying and selling shares since 1992. I was bad to average at it in the beginning but in the last few years I have done a bit better. I do most of my dealing in a ISA wrapper so there is nothing to tell the tax man luckily.

Since October I have been getting jobseekers allowance (not the income based one because I am not entitled to that) and have not found a job to suit. They have been crediting my NI contributions for me I am told. But I now thinking of telling the jobseekers that I wish to stop looking for a job.

I think I may be able to survive on my sharedealing (fingers crossed) but where does that put me with NI contributions, am I self employed, un-employed or what and how do I deal with my contributions?

Since I might struggle for a while, am I entitled to any help towards my contributions, it's not as if I can say I am on really low pay?

If I were to do really well could I just buy paid up years when I fancied, to make it complete?

What about SERPS I think it is, where I paid into a 2nd state pension to give me a better pension when I retire? Can I still pay this if I can manag; so to get a better pension, or am I stuck with the ordinary pension, ie is there a way to pay different amounts to increase your position to give the equivalent effect of me being in a well paid job presently even though I have no job?

Any help appreciated.

CIS

You would be un-employed.

An unemployed person needs to pay class 3 NI at #7.55 p/w (06/07).

A S/E person pays #2.10 per week (06/07)

State second Pension (formerly SERPS) is not accrued on payment of class 2 or class 3 NI, nor can you you pay any extra to get it. It is only paid to employed persons or those on certain state benefits/credits.

You can backpay NI for up to 6 tax years back, you get to pay for the 2 tax years after its due at the original rate, for teh next 4 years they would up-rate to the current tax years NI rates.

Best thing is to get a state pension forecast on 0845 300168 or https://www.thepensionservice.gov.uk. It'll tell you where your at and what NI you can pay to increase your record. I would recommend you get one around sept/oct each year and it'll tell you how much you need to pay for the previous tax year.

happyhero

Thank you very much for the info CIS, much appreciated.

Although I understand what you say I am not sure I understand the effects it will have on my change in situation, i.e. I was involved with Serps when employed but now I am not, and by what you have said, it seems I cannot get myself into a similar situation (paying onto something that is going to make things better), so although on the surface this seems bad, is it? Should I be bothered about my change in circumstances? I mean what if i was a really successful investor, it seems I still could not better my position in this way(state pension related), so what would I do, pay into a personal pension scheme. Simply what should I be thinking of doing to improve my pension situation or better it compared to where I was before, if I can afford it?

Have I lost out by getting into this position, ie now that I have to sort my pension out some other way?

Also this £2.10 for S/E person sound great, with what I have said could I adopt this status in some way? I mean if successful, I am working for myself to generate an income, couldn't that ever be classed as S/E?

Sorry for so many questions.

EdInvestor

Hi happy hero,

First of all well done in getting to the point of being able to live off your returns from investing :T

Secondly I wouldn't worry too much about pensions, your monster ISA should do the job for you perfectly well, you just continue taking your income forever. The max you can contribute to a private pension is 3600 a year if you aren't working.

IMHO you should give priority to keeping up your state pension though - you can leave it for six years before you need to contribute the back payments. The state pension would currently cost around 90-100k to buy on the open market, so it's really worth keeping it up.

For you it would be tax free as well (assuming you have no other pensions apart from some SERPS) as it would come inside your personal allowances when retired.

You could tryinvestigating the self employment thing but it's probably not worth it as the state pension payments are quite low.

CIS

As to whether you could justify the share dealing as a buisness, I dont't know, probably the best thing to do is to speak to either HMRC or an Accountant.

The only problem is , if you register S/E, then the tax and NI you pay in total (including Class4) may be more than the #5 per week difference beteween class 2 and 3.

happyhero

Cheers guys, all very helpfull, I appreciate the help, but I forgot to ask about my wife. She does catering in a local school, 2 hours a day, and so is on the books i.e. she would be paying tax if the earnt enough, but doesn't, but she does seem to pay some NI payments. Should she be doing anything? I have heard this thing where the wife's pension is based on the mans contributions, so does she need to do anything, i.e. could she get away with doing nothing as long as I keep my payments up to date? If this is so why does she pay anything at all?

Also not answered above I believe, am I now in a inferior position to what I was in in my SERPs days? It seems now that I am limited to small payments I can pay in so does it not follow that I will get a lot less than I would have if I'd continued with my SERP job, or does it not work like that?

Also why do they limit what you can pay into a private pension to £3600 per year if you are not working? What if you were a little rich (not that I am), what a pain all these small limits when all you want to do is pay a lot in to get the highest pension you can, whether it be state or private. What would someone do to overcome this problem?

CIS

Each oersons pension is based on their own NI records except under certain, specific circumstances.

These are:

When the wife retires, when her husband is in receipt of his pension, if she gets less than 60% of the value of his Basic State Pension, her pension is topped up to that value.

Divorcees

Widow(ers)

As long as shes paying NI each week then she will accrue Basic State Pension.

For Basic State Pension, it doesn't matter how much you earn , as long as its over #4264 you'll get the same rate accrued as anyone elese, even if the other person earned #1 million a year. Its only on additional Pension where the rate of income comes in to play.

AFAIK
Isn't the limit set at #3600 becasue the payments in to it are tax free, if they gave a higher limit it would be used for tax avoidance.

happyhero

Cheers CIS, sorry to keep on and don't mean to be dumb but this question still appears not be answered to me,

"am I now in a inferior position to what I was in in my SERPs days? It seems now that I am limited to small payments I can pay in so does it not follow that I will get a lot less than I would have if I'd continued with my SERP job, or does it not work like that?"

The reason I keep on about this is because I think I was heading for quite a decent pension I felt with SERPs etc, and now that, that has been taken out of the equation I want to know if my possible pension is decreased in comparison, so that I could then decide to make up the difference some other way. To me it appears I have changed to a weaker stance because surely I'm not paying SERPs so I cannot getting any additional pension at the end. Ok I may get some for what I have paid into SERPs up until now but surely it would have been more if I had continued to do so for the next 20 years (I am 45 by the way).

You say it doesn't matter how much you earn as long as its over £4264 but with my situation neither of us will, since my wife only does a very small catering job that does not reach this figure a year and if I live off my ISA, neither will I, so how will that effect us both being under the £4264.

Also if I am understanding this correctly, if I paid regularly the £7.55 per week are you saying I would get the same full state pension that everybody else would even though they may have to pay more for it, in their salery by way of a different NI class, ie my NI contributions when I was working were about £250 per month? (I assume some of this went to SERPs).

Sorry CIS, if I am becoming exhausting, but this is really helping me, I am learning plenty here.

CIS

Yes, but an employed wages always would have counted towards State Second Pension or you would have paid lower to pay in to a contracted out scheme.

I think that the fact that you get effectively two different pensions from one lot of contributions tends to blur the actual differences between the AP and the BSP.

The BSP works on a flat rate for each full contribution year, whereas the AP is based on revalued earnings, generally the more you earn, the more AP you get.

For each tax year of Class 3 conts, yoy pay around #395, to get a BSP of #104 per annum. it will take around 3.5 years to pay back 1 year of class 3 conts.
A return of 30% or so is probably unachievable under any form of investment, plus remember that the rate increases each year.

"am I now in a inferior position to what I was in in my SERPs days? It seems now that I am limited to small payments I can pay in so does it not follow that I will get a lot less than I would have if I'd continued with my SERP job, or does it not work like that?"

Probably yes, IIRC a moderate rate earned, contracted in, would get around #2.00 AP accrued for each tax year.

To be in the same position, you need a scheme that will provide approx #2 per week , minimum, for each year that you pay in. Most moderate earned will probably pay around #2000 in NI each year, I dont know if you'll get a scheme that will return #100 per year , for the rest of your life, for only #2000 invested each year.

EdInvestor

If you continue to pay the appropriate NI contributions while "unemployed" you will get the basic state pension.

If you aren't employed, or a self employed, you won't get the earnings related additional pension (SERPS/ S2P) from now on - though you will have already accrued a chunk.

This will reduce your overall state pension.For people retiring now with a full record and at the top of the earnings ladder,SERPS/S2P more or less doubles the basic state pension, so you get around 160 pounds a week instead of 82.

However the S2P amount is scheduled to fall for higher earners , because Gordon has rejigged it so as to give a better pension to the low paid and carers. This could benefit your wife, assuming she is earning above the "Lower earnings limit" and paying NI, thus accruing both basic state pension and S2P.

So what may happen is that your state pension falls, while hers rises.This might actually work out quite well tax wise, as usually what happens is that the husband has too much in taxable pensions while the wife has too little, and thus his tax allowance is busted and hers is under-used.

Both of you should get state pension forecasts to see the outlook ( I wouldask for one every year, so you can see what's happening to S2P):

http://www.thepensionservice.gov.uk/atoz/atozdetailed/rpforecast.asp

ManAtHome

EdInvestor wrote:

However the S2P amount is scheduled to fall for higher earners , because Gordon has rejigged it so as to give a better pension to the low paid and carers.

Yes, vaguely remember this being announced some time back - the magic numbers £8k to £12k (ish) pa are lurking somewhere at the back of my brain..or was it up to 8K better, over £12k worse.?