Self-employed? Start saving for your pension now

Self-employed workers continue to fall behind on pension planning as calls grow to expand auto-enrolment.

New research by the Social Market Foundation has found that just 22% of self-employed Britons currently contribute to a private pension plan and even among those who do, many contribute irregularly, or pay in a flat amount that they don’t increase when their income rises.

The result, suggests the think tank’s modelling, is that two-thirds of self-employed people are unlikely to achieve a level of retirement income that Pensions UK regards as the minimum necessary for old age.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

More than half are likely to be dependent solely on the state pension.

The research highlights the problems faced by Britain’s five million self-employed workers. Almost all employees are now covered by the auto-enrolment system, which requires employers to offer an occupational pension scheme and to make contributions on their behalf unless they have specifically opted out; as a result, 79% of employed Britons are making regular pension savings. However, there is no equivalent support for self-employed savers.

The Social Market Foundation thinks a series of “nudges” could encourage more self-employed people to save.

For example, banks could monitor self-employed account holders’ income and automatically suggest that people raise their pension contributions when their income increases.

It is not just the Social Market Foundation that is calling for changes.

Research by PensionBee among 1,000 adults found 66% believe the self-employed and gig workers should be automatically signed up to a pension through their tax return.

Lisa Picardo, chief business officer UK at PensionBee, said: “Auto-enrolment has transformed the savings habits of millions of employees, but too many people are still shut out of the system simply because they work for themselves or earn their income in non-traditional ways.

“This research shows the public is firmly behind reform. Expanding auto-enrolment to include self-employed and gig workers would be one of the most powerful steps the government could take to close persistent gaps and set the UK on a credible path to pension adequacy for everyone. Invisible workers cannot remain invisible in retirement policy any longer.”

Alternatively, HM Revenue & Customs could use the self-assessment tax return to prompt self-employed people to explore pension savings.

But one problem highlighted by the Social Market Foundation, is that onerous regulation on financial advice often gets in the way of such nudges.

Financial services firms may be able to spot opportunities for savers to increase their pension provision, but are nervous about pointing these out, because they will be seen to have offered financial advice.

However, changes are likely to take time. The government’s new Pension Commission, an investigation into potential reforms of the pensions system, has been asked to consider the plight of the self-employed. But it isn’t due to present its findings until 2027.

Two main retirement savings options for self-employed workers

In the meantime, there are good pension savings options for self-employed workers to explore.

SIPPS

In particular, self-invested personal pensions (Sipps) are a very flexible way to save for retirement.

They enable savers to contribute as much as they can afford – and to vary how much they save from month to month – and offer exposure to a wide range of investment options.

Competition between Sipp providers is tough, which has seen charges come down.

Moreover, while self-employed savers don’t have access to an employer’s pension contribution, they do get support from the state.

They’re entitled to the same tax breaks on private pensions as all other savers – including upfront income tax relief on contributions at their highest marginal rate of tax.

However, to get the full benefit of this relief, they may need to claim support through the annual self-assessment tax return.

ISAs

Alternatively, some self-employed workers prefer to save for later life through tax-free individual savings accounts (ISAs).

The advantage of this approach is that it’s usually possible to make withdrawals from ISAs at any time, whereas money tied up in a private pension can’t be accessed until the saver reaches age 55.

A self-employed person can also put up to £4,000 per year into a Lifetime ISA, using part of their ISA allowance, and use it for their retirement savings to access from age 60. Plus the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. There are limits though as contributions can only be made into a Lifetime ISA until age 50.

Self-employed workers with unpredictable incomes are often nervous about locking savings away.

Ongoing rumours about ISA reforms in the Autumn Budget and cuts to the tax-free savings allowance may also be a deterrent.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.