Self-employed pensions gap
Saving for the future is part of business planning but over two-thirds of homepreneurs are making no provision for their future. In this article, I consider the time bomb which is the self-employed pensions gap.
My corporate life was dominated by the word pension; firstly, with Ford of Europe where I was on the pensions investment team looking after hundreds of thousands of workers’ pensions and subsequently in the City, where I managed the pension funds of major household names both in the UK and the US.
Despite being young and removed from the savers, I felt the responsibility of being the steward of these future pensioners' hard-earned savings by managing the funds within very strict guidelines. Most of these pension schemes were funded by contributions from both the employer and employee much like the auto-enrolment model we see today.
Are you ignoring the inevitable?
But for the millions of self-employed, the situation is less rosy.
With the introduction of auto-enrolment in 2002, many more employees now contribute to a pension scheme than ever before and from this April the contribution by the employee will rise to 5%. Auto-enrolment has added over 10 million people to the number saving for their retirement. These are all employed – so what about the growing numbers of self-employed?
Could you live on £164.34 per week?
A report commissioned by IPSE last year highlights the potential retirement poverty gap faced by the 4.8million self-employed. Only 31 percent are saving for later life. And the problem is only going to get worse. Since 2000 the number of self-employed has increased by 50 percent and the trend is upwards – outsourcing, contracting and remote working is on the increase. Why? It saves companies big money! Less office space, lower taxation and employee benefits and increased flexibility all help to reduce costs.
The IPSE report highlights three groups who are less likely to save:
- New entrepreneurs who are focusing on the here and now and who may be strapped for cash.
- The young, who may be self-employed due to lack of jobs and who may not have mapped out a career path.
- Women. This group of self-employed is growing the fastest and yet has the lowest pensions savings rate.
Clearly, there needs to be more education surrounding the impact no pension will have on the quality of life in retirement.
Options for self-employed pensions
What is the solution if you have stopped saving for the future?
1. Start as soon as you can
It's better to start saving young. Saving is a habit and once you get used to even a small amount leaving your bank account every month, it's a habit you'll be glad you started.
2. Start small
Even a 1% increase in your prices set aside for the future is better than nothing.
3. Consider alternatives
Even if you don't want to commit to saving into a pension, look at alternative tax-free savings (such as ISAs for UK based nationals) Get advice do research.
4. Review your existing pension pots
If you and/or your previous employer paid into a pension scheme, it's vital to find out the details of the contributions and if necessary consolidate all the schemes into a single entity. Track down your old pensions by visiting the Money Advice Service website.
5. Learn about the different options
In the UK, there are essentially three different types of pension for the self-employed – a personal pension, a self-invested personal pension (SIPP) and a stakeholder pension.
For a guide to the differences between these schemes, download the Hargreaves Lansdown guide.
6. Personal and company contributions
In the UK, if you pay your pension contributions from a personal bank account the government will add to your savings amount. For every £100 of pension contribution, the government adds £25.
You can pay from your business bank account and the amount reduces your tax. (Seek guidance from your accountant and financial adviser on your specific situation)
7. Ask for advice and do your homework
Many financial advisers offer a free, no-obligation first meeting. Beware websites which don't look official – there are plenty of scammers out there. Your accountant may be able to direct you to trusted advisers.
My advice is don’t bury your head in the sand, don’t rely on downsizing your house and don’t rely on inheritance!
Take control over your finances and sleep soundly at night safe in the knowledge that your future is secure.