MONEY Q&A: The freelancer's trap
Sunday 15 November 1998
You may have to pay three classes of National Insurance:
Class One. This is deducted by your employer (by each one if you have more than one job) if you are paid more than pounds 64 a week, pounds 278 a month.
Class Two. You are responsible for paying pounds 6.35 a week if you are self- employed or have freelance earnings. You can claim exemption if you earn less than pounds 3,950 in the 1998-99 tax year. You must use form CWF1, Notification of Self-Employment to register as self-employed with the Contributions Agency even if you claim an exemption. If you already pay Class 1 contributions and your freelance contributions are less than pounds 800 a year, you do not have to register.
Class Four. These are payable on self-employed or freelance earnings at a rate of 6 per cent on earnings between pounds 7,010 and pounds 24,180 in the 1997-98 tax year to which your tax bill relates. It is these Class Four contributions which are assessed by your tax office and added to your tax bill.
However, there are limits on what you have to pay: pounds 2,299.14 in 1998- 99, pounds 2,201.62 in 1997-98 - or less if you are in a contracted-out employer's pension scheme. You will already have paid the maximum Class One contributions if you earned pounds 24,180 in your main job in 1997-98 (pounds 25,220 in 1998-99). Claim a refund if you paid more than the maximum, for example by having two jobs where Class One was deducted. For your precise position, you will have to consult leaflets CA2, "Small Earnings Exception", CA72, "National Insurance, deferring payments" and CA01, "National Insurance for Employees" from a local Contributions Agency office.
The annuity crisis
I am nearing retirement and have to decide what to do with my with-profits pension fund. Should I postpone buying an annuity until rates improve? Does it make sense to activate my pension as soon as possible using income drawdown?
You are caught up in what can reasonably be described as The Great Annuity Crisis. At some stage you will have to use all or the bulk of your pension fund in order to buy an annuity. You will get a predetermined annuity income for the rest of your life based on annuity rates on the day you buy, either at a flat rate or a lower, starting income with built in rises. You choose.
Unfortunately, annuity rates are plummeting (see feature, page 19). Long- term, and now short-term, interest rates are falling as inflation falls. There is even talk of deflation (falling prices), which is bad news for people buying annuities. The older you are when you buy an annuity, the greater the income. But deferring an annuity may turn out to have no advantage if rates fall further or life insurance companies revise their life expectancy tables. And you have to balance the extra income you may get against the income you will definitely lose by not buying your annuity sooner.
You might expect that delaying an annuity will give your pension fund more time to grow. Bigger fund means bigger annuity, other things being equal. But the recent stock market uncertainty could continue. It is possible the manager of your fund could lower the terminal bonus on your with-profit policy. Insurance firms are giving more importance to the terminal bonus, as opposed to the annual ("reversionary") bonuses which once given, cannot be taken away.
Income drawdown seemed like a great idea when it was introduced three years ago. You can postpone your annuity until the age of 75 at the latest in the hope that annuity rates will improve, while still drawing an investment income from your fund. But this option incurs higher commission to the financial adviser and extra costs to insurance companies of monitoring your withdrawals in line with government limits.
Insurance companies are now carrying out the required three-year review of the first drawdown customers. They are set to cut the income of participants. In addition, there is a real danger of your capital being deleted, especially if you have taken the maximum amount of income. This leaves you much worse off when you come to buy the annuity. Even if drawdown turns out to be a good choice, it is generally not cost-effective if your pension fund is less than pounds 100,000.
Get some advice: independent specialists include the Annuity Bureau on 0171-620 4090, Annuities Direct on 0171-588 9393, and Annuities Solutions on 0171-628 3455.
Write to the personal finance editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL, and include a phone number; or fax 0171-293 2096; or e-mail email@example.com
Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies, nor can we guarantee to answer letters. We accept no legal responsibility for advice given.
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