Do the UK’s self-employed lack a retirement strategy?
The number of people who are self-employed in the UK increased by more than 20 per cent between 2008 and 2015, from 3.8 million to 4.6 million, according to the Office for National Statistics. But according to new research by Aegon, only 44 per cent of them have a retirement plan, compared to 58 per cent in Germany, 63 per cent in the US and 53 per cent in Canada.
Britain has a historically high level of self-employed workers, making up 15 per cent of the workforce, with taxi driving and construction work the main occupations. Self-employed people will receive a basic state pension from national insurance contributions paid on income and annual profits.
Almost half of self-employed said they are relying on the state pension for retirement, and 40 per cent also cite their own savings. In addition, more than half of UK self-employed workers expect to carry on working past 65.
Kate Smith, head of pensions at Aegon, says: ‘Without employer-sponsored plans, the self-employed are flying solo when it comes to pensions. Achieving long-term financial security and peace of mind in retirement requires a rigorous approach to saving and proper planning.’
She recommends that the self-employed can financially prepare for retirement by starting to save early and getting into the habit of saving regularly. Second, they could automate savings by setting up a direct debit into their savings account or pension.
They should also make up any gaps in their national insurance record to make sure they get the full state pension. And finally, they could create and write down a long-term financial plan that includes a ‘plan B’.
Claire Trott, head of pensions strategy at Technical Connection, adds: ‘The first thing that the self-employed need to consider is the state pension. If they are going to get sufficient qualifying years credit to benefit from this, they should establish how many years they have qualified for already and whether they can pay additional contributions to ensure that they get their full entitlement. Under the new state pension they will need 35 qualifying years to get the full amount.
Self-invested personal pensions (Sipps) are one way for those who are self-employed to build up their pension funds and to create retirement drawdown portfolios which they can use to provide income when they stop working. Investors get full tax relief on all their contributions.
‘Saving to a pension scheme to replace their income in retirement is key. Many self-employed just continue to work well past the state pension age and some never stop. Paying pension contributions is very tax-efficient and the monies saved don’t need to go into anything complex or costly. A pension scheme with a good range of funds shouldn’t mean that too much is lost in charges. What is important is to save regularly and start as young as possible: this gives the funds more years to grow in a tax-free environment,' says Trott.
‘The pension freedoms should encourage the self-employed to save for retirement, as many don’t retire fully if at all, and taking income through something flexible like drawdown can work very well in this type of scenario. This means they can take more income when they need it and less when they are working, so they aren’t paying extra income tax on income they don’t need.’
The new Lifetime Isa (Lisa) is another way in which the self-employed can prepare for retirement; they get a 20 per cent government bonus and will be able to make withdrawals tax-free after age 60. But Lisas are currently still in the process of being launched, and have a hefty early withdrawal charge which could prove tricky for those who need flexibility in their finances.
Jon Greer, pension expert at Old Mutual Wealth, has previously suggested that, with some amendments, the Lisa could be beneficial for the self-employed. 'For example,' he says, 'it should be accessible [to] 55 [years old, instead of the current 40] so those who are self-employed can benefit from the government top-up.
'The government could even bring in greater flexibility to the withdrawals for this group, given that self-employed people are often reluctant to tie up their money and may have times when cashflow is tight.'