• Official stats reveal the number of people classed as self-employed in the UK is now just under 5 million, an increase of 162,000 compared to a year ago
• An estimated 14% of this cohort are saving in a pension, meaning 6 out of 7 (4.2 million people) face working longer or living on less in retirement
• Conservatives pledged to extend the principles of auto-enrolment available to the self-employed in their 2017 manifesto
• Government must urgently set out a comprehensive plan to address the self-employed savings time-bomb
Tom Selby, senior analyst at AJ Bell, comments:
“While automatic enrolment is slowly addressing chronic under saving among the employed population, it does absolutely nothing for the self-employed.
“As the rise of the ‘gig economy’ drives substantial increases in the number of self-employed workers, the UK risks fragmenting between those who have a pension and those who do not.
“The Conservatives pledge to extend auto-enrolment to the self-employed has so far proven an empty promise, meaning millions of people risk being left behind and facing penury in retirement.
“This retirement income gap will be further compounded by planned state pension age increases to 67 by 2028 and 68 by 2037.
“The Government has suggested behavioural nudges targeted at promoting pension saving to the self-employed are being trialled with the aim of boosting engagement. While welcome, it is hard to imagine this will be enough to significantly alter behaviour.
“There are interventions policymakers could pursue to incentivise the self-employed to save more. The Lifetime ISA could potentially be an attractive product for this market but is constrained by a combination of age restrictions and the 25% exit penalty.
“If the LISA was opened up to all ages and the exit penalty lowered to 20% - meaning it just returns the Government bonus – it would become significantly more attractive.”
Four reasons the self-employed should consider pensions
1. Tax relief boost
One of the biggest benefits of making personal savings in a pension is the bonus added through tax relief.
Tax relief at 20% is automatically added, while higher (40%) or additional (45%) rate taxpayers can claim up to an extra 20% or 25% through their tax return.
The below table shows you how much saving £100 in a SIPP will cost.
|
Tax bracket |
Upfront cost of £100 in a SIPP |
Extra relief claimed through tax return |
Effective cost of £100 in a SIPP |
|
Basic-rate taxpayer |
£80 |
£0 |
£80 |
|
Higher-rate taxpayer |
£80 |
£20 |
£60 |
|
Additional-rate taxpayer |
£80 |
£25 |
£55 |
2. Paying your profits into a pension
If you are a business owner, you might consider paying directly from your business into your pension.
Pension contributions are business expenses, so your company would get corporation tax relief of 19%. If you chose to make a payment to your pension rather than take profits as dividends then you also save income tax.
Note this option isn’t available if you’re a sole trader, although you can of course still make personal pension contributions.
3. Pensions ‘carry forward’
There is another way the self-employed and business owners could further boost their pension fund.
Carry forward is particularly useful for anyone who has set up a pension but hasn’t been able to use up their available allowance. This is often the case for people who may need to prioritise investing in their business in the short-term over saving for the future.
Carry forward is essentially a flexibility which allows you to make up for lost time. Provided you were a member of a pension scheme at the time, you are allowed to utilise up to three years of unused annual allowances in the current tax year.
That means you could benefit from an annual allowance of up to £160,000 using carry forward, including tax relief.
4. Flexibility at age 55
Historically a major drawback of pensions for self-employed people was the perceived lack of flexibility.
The old ‘locked-box’ structure – where most people ended up buying an annuity at age 65 - might not have fit into their plans.
However savers can now choose how to spend their retirement funds from age 55 (age 57 from 2028). There are three main options:
• Drawdown: take up to 25% of your fund tax-free, with the rest taxed in the same way as income when you take it out. Your fund will stay invested and you’ll need to think about a range of things including how much risk you want to take and how much income you can safely withdraw;
• Ad-hoc pension lumps sums: take individual chunks out of your pension with 25% of each chunk tax-free and the rest taxed in the same way as income;
• Annuity: hand your pension pot to an insurer and receive a guaranteed income stream in return. These can be over a fixed-term or for life, and you can add things like pensions for your spouse and inflation protection (although this will lower your starting income).
For many people a combination of these income routes will provide the right retirement solution.
And while pensions are first-and-foremost designed to provide an income in retirement, ultimately it’s your money and you can use it how you want.
