Droping State Pension and not paying National Insurance

firsttimetom

Hi,

I seem to remember reading (or perhaps having a wierd dream) that is was possible to pay National Insurance into a private pension and take out health insurance rather than pay it to the state.

is this correct? And if so is it beneficial. I pay a lot of National Insurance (Class 1, Class 2 and Class 4) and I am aware I could receive a lower state pension as I am self employed. I am also increasingly concerned that I may not actually receive a state pension by the time i reach retirement age. I am 23 now.

I have been paying and intend to pay £3000 into my ISA every year if I can to supplement my retirement income, but would also like to ensure I secure a good pension plan. I have maxed out my stocks and shares ISA for the last 2 years, but I have now stopped paying into this and would actually withdraw it to go towards my House deposit if required.

Thanks in advance for any help or advice you can offer.

meester

This is called Contracting Out, and you only get a fairly small PART of the NI rebated.

It's generally not recommended now, as a lot of people lost a lot of money as a result of doing it on the basis of professional advice and now the advisers are extremely leery of recommending it.


http://news.bbc.co.uk/1/hi/business/4174210.stm

BTW, class 2 and class 4 NI are paid by self-employed. Class 1 is for employed people.

Ian_W

Basically it's a severe case of "weird dream syndrome" - you should get it seen to!!

You'd have to spend more on health insurance that is so comprehensive as to cover all the problems, accidents and illnesses the NHS covers - than all your NI contributions. Most Private Health insurances, even ones that very comprehensive and expensive, tend to have lots of exclusions which, with all its' faults, the NHS will cover - even if you have to wait for treatment.

In respect of pensions the self-employed don't qualify [or pay AFAIK] for the state 2nd pension but get the same basic state pension as everyone else provided you pay enough qualifying years of NI. What I don't understand is why you pay class 1 which I understood is for employees?

I am also increasingly concerned that I may not actually receive a state pension by the time i reach retirement age. I am 23 now.

So was I at 23 but with 8yrs to go to to pension age, looks like I was wrong - you might well be too! State Pensions have been around for 100yrs or so, no reason why they shouldn't be there for you in another 45. Seems such a long time off in your 20's but don't worry - you'll be there before you know it!
:eek:

purch

(or perhaps having a wierd dream)

........usually involving a 'white powder' :cool:

.......there are times I believe I am getting value for money for all the Tax and NI I pay.....then I wake up and remember I'm living in Gordon Browns World where 'prudence' means a record balance of payments defecit and the worst public services :eek: in the Western world !!!!

jamesd

Only those in PAYE employment can contract out and get some of their NI paid once a year to their chosen personal pension provider. Since you're self-employed none of what you have written can apply to you and the health and unemployment insurance parts can't be rebated to outside providers regardless of whether employed or not.

Contracting out is useful for anyone who wants to retire before state retirement age, since the contracted out money can be used for a pension from age 55. It's also of interest for those with a medium or above risk tolerance who are below the early fifties, though the return on investment needed above the early forties makes it likely to be less good than contracting in and accepting the later state retirement age payments instead. The payments from past contracted out years can still be taken from 55, it's only the later payments that are affected. At 23 it's likely that you would be better off contracted out but being self-employed this doesn't affect you.

While you say that you are self-employed, if you own your own limited company you may be a PAYE employee of your company and in that case you could contract out.

You should use pension contributions for at least some of your pension if you are paying higher rate tax, planning to get at least 5-6k in pension income to fully exploit the planned personal allowances for those who are over 65. It's also more efficient to use pensions if a higher rate tax payer for pension income up to about 15,000 a year.

firsttimetom

Hi Guys,

Thanks for the replies. Just want to clear up the NI issues first. I am Employed full time (hence class 1) and ALSO run my own business (2 and 4).

You've all given me a lot to think about. I beleive that the retirement age will be 67 in the near future, is this the earliest I withdraw state pension. I will need to get a private pension sorted in the meantime as I would like to retire earlier than this.

I do pay paye, so could contract out if needed.

Who would I need to see about this type of thing? An IFA?

I'm happy with the way my ISA is building up, but would liek to benefit from tax relief by paying into a private pension. I was paying £333 a month to my stocks and shares ISA, but I am looking to the nearer future and saving everything I can for a good sized house deposit.

Ian_W

The age isn't going up shortly, but certainly before you reach pensionable age - IIRC it's 66 in 2030, 67 in 2040.
Just a thought before you go down the private pension route - does your employer offer a pension scheme to which they will make a contribution? If so that will probably be your best bet as you'll get free money from them as well as tax relief on your contributions.
For private pensions an IFA is probably best but read THIS THREAD as you can over-pension yourself and ISAs may be a better bet.

jamesd

You can contract out for the employed part so that's definitely worth considering given your age, if you have a possible desire to retire earlier than state pension age. It won't be too hard to beat the state provision given such an early start.

Yes, the state retirement ages are rising, it's one of the cases where the benefits of past state pension contributions have been retroactively reduced. That's the earliest you can withdraw the state pension including the contracted in portion if you're contracted in.

An IFA is probably going to be needed for contracting out. It can be done for as little as a hundred Pounds to get a modern personal pension with no onging commission, depends on the IFA. No commission is probably best because that lowers the annual management charges on the funds held in the pension but another option is CAR where you can pay a fee and have the commission rebated to you. Means you'd get payments from the IFA each year once the commission has fully repaid the fees and long term that can be cheaper than the fees only route.

If you're not a higher rate tax payer but think that you will be in the future you can benefit from using the S&S ISA until you're higher rate, then getting higher rate tax relief as you gradually move money from ISA to pension. Can't do this with the money from contracting out, though.