The self-employed must save more for their retirement

Britain’s boom in self-employment threatens to leave millions of people short of money in retirement, says David Prosser. Too many are making little or no provision for later in life.

Britain's boom in self-employment threatens to leave millions of people short of money in retirement, with large numbers currently making little or no provision for later in life.

The number of self-employed people in the UK rose to 4.8 million last year, accounting for just over 15% of the labour market, according to data just published by the Office for National Statistics (ONS). But the ONS figures also reveal that nearly half of self-employed workers between the ages of 35 and 54 have no pension savings at all by contrast, only 16% of employed workers in this age-group are in the same position. And the outlook for older self-employed people doesn't look much brighter. Some 30% of people over the age of 55 working for themselves have no pension wealth, says the ONS.

The data make for depressing reading, particularly given the government's seeming inability to offer much support. Ministers have just announced their response to the Taylor Review, which concluded last year that workers in the so-called gig economy were being denied many employment rights. The government is now promising to consider extending the auto-enrolment pensions system to these workers, who fall between traditional definitions of employment and self-employment, but is offering no such help to fully self-employed workers.

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It's not all bad news. There is some evidence that self-employed people are more likely to have other types of wealth possibly because they are uncomfortable with locking up their savings in vehicles that cannot be accessed until aged 55. For example, over-55s in self-employment are twice as likely to have property wealth of more than £500,000 as employed people, potentially opening up options such as equity release for generating income later in life. It's also worth being aware that the problem is not confined to the UK, with other European countries also now considering how to provide support to growing numbers of workers not in conventional employment. Belgium, for example, has just overhauled its tax system for self-employed workers, including greater support for pension savers. However, as the UK government has merely promised to review its options in the years ahead, self-employed people should not expect reform in the near future.

Alternative options for retirement saving

For self-employed workers with no access to an occupational pension scheme, a personal pension from a private provider such as an insurer or a fund manager is a potential alternative. These plans qualify savers for tax relief on their contributions at their highest marginal rate of income tax so a £1,000 contribution will cost only £800 and £600 for basic-rate and higher-rate taxpayers respectively.

The plans come in different forms, from simple stakeholder pensions to self-invested personal pensions (Sipps), offering greater investment freedom and control. Take professional financial advice on the right plan for your circumstances: returns will vary according to charges and investment performance.

One concern for some self-employed workers, who may lack certainty about their future income, is tying up savings on which they may need to fall back. Consider options such as an individual savings account (Isa). For example, the new Lifetime Isa provides government top-ups that are effectively worth the same as tax relief on private pensions, though annual contribution limits are much lower and cannot be opened by those over 39. There is also an early withdrawal penalty of 25%.

Annuity rates look more attractive

Annuities have fallen out of favour since the pensions freedom reforms of 2015, with many investors preferring to draw retirement income directly from their savings rather than be locked into a fixed income at a time when insurers' rates have been close to all-time lows. But with stockmarket volatility unnerving many income-drawdown investors and annuity rates finally on the rise, the products are starting to look more attractive.

Annuity rates tend to move in line with 15-year gilt (government bond) yields, which hit an all-time low of 0.9% in August 2016, when the Bank of England cut interest rates to 0.25%. Since then, however, the mood has shifted in favour of rising interest rates, with the Bank's first increase in more than a decade coming in November 2017 and further talk of tighter monetary policy last week. Gilt yields now stand at around 1.8% that's double the low, though still miles off the yields of 5% seen prior to the financial crisis.

Annuity providers are responding accordingly. Over 2017 as whole, the average annual income for a standard-level, without-guarantee annuity for a 65-year-old rose by 1.66% for a £50,000 pension pot, according to Moneyfacts' data. It was the first year since 2013 in which annuity rates rose, and providers have so far increased rates further in 2018 Legal & General, for example, raised its rates just last week.

However, it remains as important as ever to shop around for the best possible deal. You may also want to take advice on whether to delay annuity purchase in the hope of further increases.

Tax tip of the week

If you give money as part of a pattern of gifts, and without affecting your own standard of living, then this will not incur inheritance tax. However, if you give money that you received in a cash windfall (for example via an insurance payout) as a lump sum, HMRC will consider this capital, and the gift will not be exempt, notes Tax Tips & Advice. So if you are helping a child with a house deposit, consider giving it as several gifts. If their need is more immediate, you could lend the difference meanwhile.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.