Pension Planning for the Self-Employed

Blog by Ruth Power, Director of FMB, our preferred partner for financial services. Financial Management Bureau Ltd is authorised and regulated by the Financial Conduct Authority Registered address: Shenstone House, Helsington, Kendal LA8 8AA Please note tax reliefs will vary and are dependent upon individual circumstances

“The rapid growth of self-employment has been a pronounced feature of the UK labour market in recent years. The number of self-employed increased from 3.3 million people (12.0% of the labour force) in 2001 to 4.8 million (15.1% of the labour force) in 2017” Office for National Statistics

According to the Office for National Statistics (ONS), the number of self-employed people now stands at 4.8 million. That is 15% of the workforce. In itself this is not necessarily a bad thing. We need more plumbers, joiners and builders right? But without an employee pension scheme, is this army of self-employed people making the provision they need for retirement? I don’t think the answer will come as a shock!

“There is a clear divide between employees and the self-employed when it comes to private pension wealth. Among the 35 to 54 age group, a large share of the self-employed do not have any private pension wealth (45.1%) compared with employees (16.4%). This continues for ages 55 and above, with the highest share of the self-employed also having no private pension wealth. This paints an interesting picture between the two age groups, as the share of self-employed with no pension wealth in the ages 55 and above age category is 30.3%, much lower than the share of self-employed in the 35 to 54 age group (45.1%).” ONS

Despite tax incentives to save in a pension, self-employed workers are not making this a priority. Even though you can now access your pension at 55, perhaps locking your cash away for the future does not suit those with a precarious income stream.

There has been talk of extending the auto-enrolment compulsion to contractors such as 0 hours workers in the “gig-economy” in a general discussion about employment rights, but this would not extend to fully self-employed workers of course. Some countries have gone further such as Belgium in their 2015 tax reforms, making social security contributions tax deductible for the self-employed and encouraging pension saving. However, given that Belgium has one of the most punishing tax regimes in Europe it’s all relative! There is nothing on the horizon to suggest the UK government will follow suit so what can we do to make sure the self-employed of the UK have the retirement they deserve?

A full financial review and cashflow model can look at the assets they have and see how best to make provision for the future. Pensions are very tax efficient and it may be that when we run the numbers it will be the right thing to do, but there are other solutions. The bare facts speak for themselves however, the self-employed should be saving more.

Read the ONS report here.