The self-employed’s pension crisis was laid bare in the recent report from the Pension Commission.
According to the report only 4% of solely self-employed people are saving into a pension. This is leaving them very vulnerable in their later years.
What is the problem?
It’s a problem that has been discussed for many years.
The self-employed are not covered by auto-enrolment, so all the work of finding a pension provider and investing is down to them. And the result is that the majority just don’t.
The problem is likely that saving into a pension means the money is locked away until they’re at least 55 (and this is rising to 57 in 2028). For someone with a fluctuating income, like the self-employed, this can cause issues and mean looking for alternative ways of saving.
Though the report did find that pension participation increases significantly around the point the self-employed become higher rate taxpayers. This could be because of higher rate tax relief on pension contributions, which are a real incentive to start putting money away.
However, the reality is that many self-employed people continue to under save, leaving themselves at risk of having to work for longer if they are to afford to retire. The report stated that an adequate pension system would need to include options for the self-employed – particularly younger people who are most at risk of not having any pension savings.
So what options are there for the self-employed?
Investing using these products is one way to help your money grow, and it’s for the long term, typically 5 years or more.
But it’s important to remember that the value of investments can rise and fall, so you could get back less than you put in. Pension and ISA rules can change and benefits depend on circumstances.
This article is for information only and not personal financial advice. If you’re not sure what’s right for you, a financial adviser can help.
Pensions
Pensions – like a Self-Invested Personal Pension (SIPP) – are a great way to save for retirement, but it leaves the self-employed with decisions around which provider, how much to save and where to invest.
It’s important to think about how much support you’re likely to need and which providers can offer that. Access to a helpdesk for instance can be really useful if you have any queries, and the quality of educational materials – like articles and webinars – can be helpful in building up your knowledge.
For those concerned about choosing their own investments, your provider should offer a ready-made option that can make those decisions a bit easier.
Lifetime ISAs
The Lifetime ISA (LISA) can also help the self-employed build up their retirement savings from their 18th to their 50th birthday.
Originally it was launched with the intention of helping people to either save for their first home or for retirement. Each contribution earns a 25% bonus from the government (up to £1,000 per tax year). The maximum you can contribute is £4,000, and this allowance refreshes every tax year.
The 25% bonus has the same effect as basic rate tax relief on a pension, except the money is still accessible, though this is subject to an exit fee of 25% of the value of your withdrawal if not being used for a house purchase or retirement. Which means you could get back less than you put in.
It’s an option that could really help this group to save.
The government is currently looking to replace the LISA with a product aimed at first time house purchases only. But it has said that those who currently hold a LISA can continue to contribute to it under the current rules.
Stocks and Shares ISAs
Another option that may appeal to the self-employed is a Stocks and Shares ISA.
You can contribute up to £20,000 per year and any income taken is tax-free. There’s also the added bonus that the money is not locked away and can be accessed at any time if needed. Although it’s always best to invest money you don’t think you’ll need for 5 years or more.
It’s an option that could be used alongside pensions or Cash ISAs as part of a retirement strategy that balances the need to invest to grow your wealth with the need for flexibility during times when income can be volatile.