Pensions and the self employed

The popularity of being your own boss has risen sharply since the turn of the century. There were 3.3 million people self-employed in 2001; this had increased by almost 50% by 2017 to 4.8 million people equivalent to 15% of the labour force[1]. Self-employment brings a number of benefits including freedom and flexibility, being responsible for your own choices and work-life balance. But there are a number of uncertainties that come with this way of working.  One major one being that income can be unpredictable and uncertain, for example if a big project falls through you might be without income until more work is found. What’s more you’re responsible for sorting out your own Income Tax and National Insurance payments and perhaps most importantly – your pension.

Self-employed retirement saving gap
At the same time as the number of people in self-employment has risen, the percentage of them who are active in personal pensions has fallen – with just 14% paying into a pension. That’s less than half the percentage who were contributing to a scheme in 2005/6[2]. Since auto-enrolment has made it compulsory for employers (even those with just a single eligible jobholder) to provide and pay into a workplace pension, around 73% of UK employees are in an active pension scheme. This leaves the self-employed lagging significantly behind when it comes to saving for retirement.

What needs to change?
It’s all too easy to neglect retirement provision when you’re busy focusing on the day to day running of your business. When you’re self-employed even taking a holiday can be a real challenge, so finding the time to prioritise pension planning can be difficult. Simply saying ‘my business is my pension’ is a dangerous approach. While the need for an accountant to help them manage books and tax affairs might be generally accepted, it’s perhaps less common to take on the services of a financial adviser. Yet regulated financial advice can help to ensure that appropriate retirement provision is in place, rather than relying on State benefits. Financial advice can also look at any pensions from previous employments, as well as your protection requirements and help to secure the financial security of your family if you’re no longer able to work.

Government input
LEBC have lobbied the government to extend the pensions advice allowance tax relief to the self-employed. They’ve also called for the government to reintroduce the facility that enabled self-employed taxpayers to pay pension contributions in the current year but have them offset against the previous year’s earnings or profits[3]. This was withdrawn in 2006 and would be another valuable way of helping the self-employed save more for their retirement.

And finally
While there are some things that could be done to improve retirement saving among the self-employed there are already some significant benefits to doing so:

  • You’ll get tax relief on your contributions up to the lower of your taxable profits or GBP 40,000 per year (less if affected by the taper, or more if carry forward is available).

  • The sooner you start saving the more you’ll build up in your pension pot - this is because of the effect of compound interest

It will be interesting to see what measures the government will take to improve pension participation among the self-employed, but the message from us is, don’t wait until then, start now.

 

[1] Trends in self-employment in the UK, Office for National Statistics, 7 Feb 2018

[2] Self employed? Your pension questions answered, Aviva, April 2017, accessed June 2018

[3] Calls for self-employed to access pensions advice allowance, Lili Bidwell, Money Marketing, 25 June 2018

 

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