Do-it-yourself pensions for the self-employed

Millions of self-employed people could be unprepared for retirement.

For some 4.8 million self-employed Britons, the waiting continues. Last month's Budget reiterated the government's promise to investigate how to help self-employed workers save more for retirement, but any change to the pension system looks a long way off.

In the meantime, 43% of self-employed people do not have a pension, according to research published earlier this year by insurer Prudential. So although pension-scheme membership has soared among the employed over the past five years, thanks largely to the introduction of the auto-enrolment system, Britain's self-employed workforce is not putting enough money aside for retirement.

Even when they do make contributions to a pension, self-employed workers are at a disadvantage, since they don't benefit from a matching contribution made by an employer. They're also at more risk of paying high pension charges, because employers can use their purchasing power to secure better deals on fees.

However, all is not lost. There are several good options for self-employed workers who are in a position to make even relatively modest regular savings via a pension plan. And not to do so is to miss out on the generous tax relief available on such contributions, paid at your marginal rate of income tax. It costs just £800 and £600 respectively for basic- and higher-rate taxpayers to make a £1,000 contribution to their pensions.

Options to consider

One possibility is to access the pension providers that run many auto-enrolment pension schemes on behalf of employers.

For example, it is possible for self-employed individuals to directly join Nest, the government-backed workplace pension scheme that runs savings plans for 600,000 employers. It invests savers' money in funds designed around their target retirement date, with money moved into lower-risk assets as you get closer to cashing in your savings. Alternatively, self-employed savers could open a personal pension or self-invested personal pension (Sipp) with a company such as a life insurer, fund manager or a stockbroker. These plans tend to offer a broader range of investment options.

In practice, the right pension for you will depend on a variety of factors, though investment performance, charges and quality of service are all important. If you're not sure how to proceed, it's generally a good idea to take independent financial advice on your retirement planning.

Lloyds case delays pension transfers

Savers hoping to transfer money out of their employers' final-salary pension scheme may face significant delays amid the continuing fall-out of a landmark legal case at Lloyds Banking Group.

Many schemes have now put all such transfers on hold as they consider the implications of a ruling last month. Judges decided that the bank must top up the guaranteed minimum pensions (GMPs) of many women who used its scheme to contract out of the state earnings-related pension scheme in the 1980s and 1990s. Women had previously been paid lower GMPs than men on the grounds they retired early and claimed for longer.

The judgment will apply in the same way to most other final-salary schemes, with employers now facing a bill potentially running into millions of pounds. But while they analyse the ruling, many scheme administrators are concerned that allowing transfers could leave them open to legal action. They fear transfers going ahead according to valuations in place today could later be found to have deprived members of a top-up related to the Lloyds ruling.

Advisers now want the government and the regulator to intervene to clear up uncertainties that the case has created. But until that happens, many schemes will be reluctant to restart transfers.

Pensions freedom doesn't always make you happy

The introduction of pension-freedom reforms three years ago appears to have prompted a significant increase in the number of complaints about pensions, according to data released by the Financial Ombudsman Service.

Complaint volumes have risen every year since 2015, when the reforms came into effect, with almost 15,000 savers having taken their case to the watchdog over the three years to April 2018.

Complaints about pensions reached 5,257 in the 2017-18 financial year, the third consecutive year in which the ombudsman's caseload increased. The watchdog settled 31% of complaints in favour of the saver, it said.

More than 10% of the cases considered over the past three years related directly to the pension-freedom reforms.

That included several hundred complaints about transfers from final-salary pension schemes to other types of pension arrangements, an increasingly high-profile issue where many consumer groups warn savers are being wrongly persuaded to give up guaranteed benefits by advisers charging high fees for managing transfers.

Indeed, while pensions account for a relatively small proportion of the total number of complaints received by the ombudsman about financial products and services, they represent a much larger share of the number of complaints about advisers.

Other types of complaints about pensions may also be linked to the pension-freedom reforms. For example, the ombudsman pointed to a significant increase in cases related to self-invested personal pensions (Sipps), the plans that many savers use to organise their pension funds in retirement. Complaints about Sipps are now running at about 2,000 a year.