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Everything you need to know about the Self-Employed Pensions Crisis

December 4, 2018

Modern working practices have evolved in recent times with more and more people choosing to go down the self-employed route. But this route to self-employment doesn’t always run smooth as all the benefits we take for granted as full-time employees suddenly become solely our responsibility.

This might be maternity/paternity leave, paid holidays and employee benefits such as financial education. It also means that you are not covered by automatic enrolment which leads into a key topic on the finance agenda – the self-employed pensions crisis.

A Motivated Demographic

While the vast majority of us in full-time employment can benefit from a workplace pension scheme with employer and employee contributions, automatic enrolment does not currently extend to the self-employed, and the impact is palpable.

In the same way that we previously discussed a tangible need demonstrated by Generation K for more solid financial planning advice, there is a demonstrable willingness and motivation among the self-employed demographic to create a more solid structure for retirement planning. This is already a pressing issue and with the number of self-employed workers rising all the time, the situation is only set to grow more serious.

Research from Prudential (conducted by independent researchers Consumer Intelligence) shows that one-quarter (27%) of self-employed people questioned would support the expansion of auto-enrolment to cover the self-employed while the same amount (27%) would back compulsory pensions saving.

The survey results also show that self-employed workers actively want legislation to be updated to cover their needs and encourage them to save for retirement.

Unhealthy Financial Habits

Not only do they not currently have access to a workplace pension scheme and the many benefits of automatic enrolment, but self-employed workers also do not benefit from a set structure in which to learn the healthiest financial habits.

Many employers are chosen to introduce financial education as an employee benefit as personal financial issues and concerns about money can lead to loss of productivity in the workplace, absenteeism and mental or even physical health issues.

But self-employed workers are at real risk of struggling during the retirement years due to lack of healthy pensions saving as well as the many risks to their own bottom line associated with unhealthy financial habits due to a lack of financial education.

Prudential research shows that two in five self-employed workers do not currently have a pension; that’s two million people who will need to rely on the state pension when they retire. For many of us, the current state pension of £8546 per year will not even come close to assuring a comfortable retirement. 

The Mid-Life MOT

So, why do so many people go without a pension? Many workers admit that they find the system confusing. It is no doubt a major challenge to connect the self-employed with a solid pensions framework. The Pensions Advisory Service admits that much of this is down to the diversity of this demographic and the many media through which they access and consume essential information.

While employers can simply send a memo to their entire team, self-employed workers may choose all different types of outlets from which to find their information. This makes it difficult to pinpoint a key message channel.

One way to meet their needs could be to introduce the mid-life MOT. The Pensions Advisory Service is currently campaigning to introduce this concept, which has been developed and tested by Aviva, Legal & General, Tpas and Mercer. Trialled formats include online and group seminars, and one-to-one advice. A report compiled by the Centre for Ageing has revealed a strong interest in the ‘mid-life MOT and high demand.

Indeed, it acknowledges the many moving goalposts that the self-employed face, including unstable income due to seasonal shifts as well as ill health and competition. The trialling companies have also identified the need for interventions to be made and conversations to be created where workers have the opportunity to ask questions and gain access to impartial advice before making any important decisions.

This could essentially be seen as providing the self-employed with their own type of financial education. It also shows an understanding by key decision makers regarding the very different levels of knowledge and understanding that freelancers currently have about pensions to create a more effective system.

Retirement Provisions for the Self-Employed

Last month’s Budget reiterated the need for a suitable retirement provision for the self-employed. The Department for Work and Pensions is due to publish a paper detailing the government’s approach to “increasing pension participation and savings persistency among the self-employed.”

In the absence of an employer, the self-employed are at risk of disengaging from essential employee benefits but progress is slowly being made. In the meantime, it’s wise to work out a plan sooner rather than later to protect your financial interests in the short- and long-term.

Self-employment covers a whole range of salaries, industries and formats including sole-traders, part-time workers and entrepreneurs. It is also becoming more and more common for those in employment to take a second job under the self-employed umbrella – for example, running an e-commerce on the side. It is your responsibility to work out a healthy retirement plan that fits with your financial goals and circumstances.

Tax Relief Opportunities

A professional financial adviser will be able to explain the pension and saving options available. For example, the self-employed can still benefit from generous tax relief on contributions at the marginal rate of income tax. You can get tax relief on contributions of up to 100 per cent of your annual earnings, or the £40,000 annual allowance, whichever is lower.

In addition, when basic rate taxpayers contribute to their pension, the government adds back the 20 per cent that’s usually deducted from their earnings.

This is information of which many self-employed workers are simply unaware and certainly provides strong incentive to start saving. While the government does need to improve their communication strategy regarding the self-employed and pensions, it’s ultimately up to every individual to act and work out the best retirement savings vehicle for them until a more streamlined system is created.

Effective Savings Vehicles

This might be joining a government-backed workplace pension scheme, opening a personal pension, a SIPP or a defined contribution plan. It’s worth noting that self-employed workers can contribute to a pension, but they don’t benefit from matching employer contributions; they may also pay higher charges as employers can often get better deals on scheme fees.

It’s also important for self-employed workers to consider other savings options for an overall healthy financial situation. This might mean saving up to £20,000 tax-free into an ISA (2018/2019) and ensuring that your money is diversified across a range of assets to minimise risk.

We would always advise taking independent advice from a financial planning specialist to work out the best savings vehicle for you. Our team at Vintage Wealth Management will help you to identify your key goals and explain the tax advantages of pensions saving as well as the range of options available to you. Contact us at or call 020 8371 3111.