Self-employed? Start saving for your pension now

Self-employed workers continue to fall behind on pension planning, new research warns, adding to the pressure for more support for this group of savers.

Just 22% of self-employed Britons currently contribute to a private pension plan, according to the Social Market Foundation; 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 the Pensions and Lifetime Savings Association regards as the minimum necessary for old age.

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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.

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

One problem, points out the think tank, 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 in 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.

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

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