There have never been more self-employed workers in the labour force, enjoying the flexibility and freedom this can bring. But many who work for themselves are at risk of an uncertain old age – or in some cases even poverty – because they are putting nothing aside for their retirement.
When the priority is building your business, it is all too easy to push pensions aside. But the oversight could prove disastrous.
Figures show that more than 60% of self-employed workers are not saving in a pension or long-term savings. (This compares with about 30% of employees.)
Alarmingly, three in 10 self-employed people are saving nothing and have little or no safety net should they find themselves unable to work or if their business started to struggle. This is according to research by investment company Fidelity.
Financial adviser Chris Wordsworth at investment firm Hargreaves Lansdown says: “With no auto-enrolment into a pension scheme or compulsion to save as employees have, it is not surprising that this aspect of finances is so often overlooked by the self-employed.
“The problem comes if you never get around to thinking about it. The longer you leave it, the less time you have to save and allow those savings to grow. The biggest message is to do something now, however small, and get into the habit of saving something each month.”
The numbers of self-employed workers have soared in recent years. There were about 3.3 million in 2001, according to the Office for National Statistics, but this had grown to just under 5 million by the end of 2018. More people, particularly those with caring responsibilities at home, are choosing to work for themselves so they can be more flexible and have a better work-life balance.
Among this growing cohort is 39-year-old Kirstie Broughton from Essex. She worked as an events manager for a City firm for 15 years before leaving to have her daughter Amelia, now 16 months old. She is in the process of setting up a business offering private antenatal classes and services. She hopes being self-employed will give her greater flexibility now she is a working mum.
The business, Blossom and Bloom Baby Services, is in its infancy and, as she is not yet earning anything from it, she says she is unable to save in a pension. But like many others, this is something she worries about.
“I can’t save right now as I’m still getting the business off the ground,” says Broughton.
“It will take about five years to pay off the money I’ve used for training courses and the business set-up costs. But after that, all being well, I will look to start saving, possibly in an Isa to begin with.
“I know pension saving is important – there just isn’t the cash in the budget at the moment.”
Wordsworth says all self-employed workers should aim to have a decent personal cash reserve before they start any long-term or pension saving. “It’s important to have a pot of easy access savings to call on, particularly for those with a variable income, who may have lean months or times with less work coming in,” he says.
With this in place, it is then advisable to look at different types of income protection insurance so you and your family are covered should the worst happen. Employees will typically have sick pay and other protection if they cannot work or are made redundant. By contrast, the self-employed do not, and any state help is likely to be minimal.
When it comes to retirement saving and getting a plan in place, Wordsworth’s advice is “keep it simple”. He adds: “It may be that you want to keep the money aside in a cash Isa throughout the year and then decide before the end of the tax year what to do with it – whether that’s moving it into an investment Isa for long-term growth, or a self-invested personal pension [Sipp].”
Rebecca Robertson, an independent adviser with Evolution Financial Planning in Southend, Essex, says people should not be put off by the jargon. A Sipp is just a way of saving in long-term investment funds. “Of course, the main benefit of pension saving over Isas or other savings accounts is that you get the government’s tax boost on top of your own saving.”
For example, if you put £80 into a pension and you are a basic-rate taxpayer, the government will boost this through tax relief to £100. Higher-rate taxpayers can claim further money back through tax relief in their annual tax return.
One alternative might be the new lifetime Isa, which also pays a government bonus on long-term saving. But you must be under the age of 40 to be eligible.
Robertson says: “There are lots of options and it can feel daunting. But there’s also help and advice out there if you need it. Now with digital or robo-advice, you can get good guidance about the best steps at a reasonable cost.
“The worse thing is to do nothing out of fear or confusion.”
If you have old occupational or personal pension plans, now might be the time to review how they fit into your wider retirement savings and whether they are in the best place. But tread with caution and seek expert independent advice. Many occupational schemes have hidden benefits, for example, or the transfer value will not represent good value for money, so you will need to weigh up your options.
“Many self-employed people say they will sell their business, and that will fund their retirement,” Robertson says. “But this is a high-risk strategy. Some businesses could be difficult to sell, they may be worth less than you think, and the selling process can take many years. I am concerned if this is someone’s sole retirement savings plan.”
Source: The Guardian