- HMRC private pension statistics show the number of self-employed people contributing to a personal pension has increased to 340,000 in 2021-22 (from 330,000 in 2020-21)
- In 2021-22 self-employed people contributed £2.3 billion, up from £2 billion in 2020-21
- Number of people who are members of a personal pension increased from 7 million in 2020-21 to 7.5 million in 2021-22
- Estimated cost of pension income tax relief and national insurance contribution relief is up to £68.8 billion in 2021-22 (from £67.3 billion the previous year)
Rachel Vahey, head of policy development at AJ Bell, comments:
“Half a million new pension savers were created in 2021-22, but only 10,000 (2%) of those were self-employed. And although total pension contributions by the self-employed also edged up, it’s growing increasingly obvious that more needs to be done to help this segment of the population save for retirement, with less than 1 in 10 self-employed workers paying into a pension annually*.
“Automatic enrolment into pensions has been a massive social success, but the self-employed have missed out on joining this new UK pension culture. Instead, many self-employed people struggle with the question of how to save whilst juggling unstable cash flows and wanting to invest in and grow their business.
“Policymakers need to pay the self-employed more attention. We therefore need a wider debate on how to encourage them to save more.
“Both self-invested personal pensions (SIPPs) and Lifetime ISAs (LISAs) offer the self-employed a good way of saving for their future whilst benefiting from a government bonus. But we need to investigate whether these products can be tweaked to make it easier for people to save.
“More should be done to understand how self-employed workers are using pensions, ISAs and other investments to build a nest egg for retirement, and explore whether the current system works for them. For those hoping to use the flexibility of a LISA to save for retirement, for example, there is the prospect of a punitive exit penalty if they find they need to access the money early to cover a change in their financial circumstances. That’s unhelpful and could be resolved by reducing the exit penalty so that it is only proportionate to the bonus payment, rather than imposing a 25% early exit penalty. Likewise, there may be a case for lifting some of the age restrictions so that individuals can open accounts later in the life as their career evolves.”
Saving for later life
“If you are self-employed then it’s possible to build a healthy pension pot to deliver the standard of living you want in retirement, with pension tax relief providing a crucial upfront boost and investment growth being tax-free too. The recent changes to pensions in raising the annual allowance to £60,000 and from next April abolishing the lifetime allowance altogether makes pensions even more attractive.
“If you are a basic-rate taxpayer, the LISA represents an attractive alternative option, as the upfront bonus of 25% is exactly the same as pension tax relief, albeit you can only receive this bonus on £4,000 of money paid in each tax year. Your LISA fund can then be withdrawn tax-free at age 60 or for a first home provided it is worth £450,000 or less. You can also access your money early if you need to, flexibility that may appeal to the self-employed, although early withdrawals will be subject to a government-imposed 25% early withdrawal charge – effectively a 6.25% penalty.
“Whichever option, or combination of options, you go for the key is to save as much as you can, as early as possible. Setting up regular contributions and increasing these as your salary goes up is a useful way to ensure you keep growing your pot while also maintaining your standard of living.”
*The ONS estimates 4.2 million people are self-employed in the UK
