New warning over pensions crisis facing 3.5 million self-employed

Automatic enrolment has started the process of getting employed workers saving something for retirement. However, the reforms do not cover almost 5 million self-employed workers, the majority of whom are not saving in a pension at all and risk facing severe financial difficulties in later life, new research suggests.*

Self-employed retirement saving has fallen off a cliff over the past two decades. In 1998, roughly half of self-employed workers were saving in a pension – fast forward 20 years and the figure had plummeted to just 1-in-6. Make no mistake about it – without urgent action, there is a real risk millions of people will sleepwalk into retirement misery.

Private pension membership in the UK: 1998/99 to 2018/19

Source: IFS

Why aren’t the self-employed saving for retirement?

It is hard to pin down precisely why self-employed pension saving has dipped so dramatically since the Millennium.

Average earnings among this section of the workforce have stagnated over the last 20 years, in part as a result of the financial crisis in 2007/08. With covid-19 and the economic lockdown further hitting the self-employed, it is possible pension provision will get even worse from here.

Given this gloomy backdrop, it is slightly odd that the proportion of self-employed workers who are ‘very’ or ‘fairly’ confident their retirement income will deliver the standard of living they hoped for increased from 46% in 2008/09 to 56% in 2017/18*.

It may be that an improvement in economic circumstances or perhaps a rise in people’s property values – still the investment of choice for the self-employed – bolstered confidence during that period.

However, the adage ‘my house is my pension’ - or indeed ‘my business is my pension’ – leaves your retirement at the mercy of the performance of a single asset. If that asset crashes in value, you may be left relying on the state pension, which in 2020/21 pays up to £175.20 per week.

What are the options for the self-employed?

The lack of an employer-employee relationship means it is extremely unlikely the Government will create an automatic enrolment-style scheme for the self-employed. It is therefore up to individuals to take responsibility or risk stumbling into penury in later life.

The good news is low-cost, simple options are available. Saving for retirement in a SIPP is one obvious route, with contributions automatically benefitting from basic-rate tax relief up front. If you are a higher or additional-rate taxpayer, you can claim back an extra 20% or 25% tax relief from HMRC as well.

Your money can then be invested and benefit from compound growth over time. You can get 25% of the money tax-free from age 55 (rising to 57 in 2028), with the rest taxed in the same way as income. Furthermore, you have total freedom over how you spend and invest your retirement pot.

For self-employed workers aged 18-39 the Lifetime ISA could be a viable alternative. You can save up to £4,000 a year in a LISA and the Government will top it up by 25% - the same as basic-rate pension tax relief – up to a maximum of £1,000. You can then access the money tax-free from your 60th birthday or if you put it towards a deposit for a first home worth £450,000 or less.

Unlike a pension, early withdrawals for other reasons are possible, although you’ll be hit with a Government-imposed charge on the money you take out. This is 20% for 2020/21 and will be 25% for 2021/22.

Work for yourself? Find out how our SIPP could help you save for your retirement.

*Source: https://ifs.org.uk/uploads/R181-retirement-saving-of-the-self-employed.pdf

These articles are for information purposes only and are not a personal recommendation or advice. Tax treatment depends on your individual circumstances and rules may change. Pension and Lifetime ISA rules apply.