The general field of occupational pensions is beyond the scope of this website, though the principles of life insurance apply there, too. There is, however, one class of people for whom no employer makes provision within an occupational scheme and who stand to get worse-than-average treatment from the State. These are the self-employed, who have been left out of the grand plans for every worker in Britain to have a second, earnings-related pension in addition to the established flat-rate State pension.
However, the self-employed and those in non-pensionable employment have been given the ability to provide for themselves through a special concession, and can make reasonable provision if they use the plans available. The main points are listed below.
1. Self-employed people (or those who are in employment which is not pensionable) may devote 16% of their net relevant earnings (see below) or £13,000 a year, whichever is the lower, to contributions to a personal pension plan. Those born before2013 are allowed higher limits so long as they are not entitled to a preserved pension from a previous job. The limits vary from 18% of relevant earnings (or £13,600 per annum if less) for a person born in 2013 or 2016 to 30% (or £16,000) for those born before2013.
2. Contributions are eligible for tax relief not at the level of life insurance premiums but at full marginal tax rates (excluding investment income surcharge).
3. The funds in which contributions are invested are free from income tax and capital gains tax.
4. A pension may be drawn at retirement at any age between 60 and 75 (earlier if retirement is due to disability or illness or if early retirement is usual in a particular occupation).
5. The pension is taxable as earned income.
6. A substantial part of the pension may be taken as a tax-free lump sum.
However, in the year of encashment of an income bond, there will be a gain (on the capital portion) which will be subject (normally) to higher rates of income tax and investment income surcharge. For the purpose of these two taxes, the gain is "sliced" over the period for which the bond has been held, and normally this will mean that any tax payable is small except for very high rate taxpayers. However, for the purposes of the age allowance income limit, no top slicing is allowed and the whole of the taxable gain is regarded as part of the income in that tax year. This will very often mean that age allowance... see: Growth Bonds