The vast majority of pension saving incentives have been focused on getting the young and low earners to contribute to pensions, but they are all targeting those who are in employment.
The self-employed have largely been left to fend for themselves. This may seem reasonable as they do have to take responsibility for things such as paying tax and national insurance, but according to the latest research by the Institute of Fiscal Studies (IFS), pension savings for the self-employed are declining.
In 1998, 48% of the self-employed contributed to a private pension, but by 2018 this had declined to just 16%. This drop has occurred despite the number of self-employed people increasing by about a third in the same timeframe. It seems reasonable to assume that in the current climate these savings are likely to have dwindled further as there is reduced work available.
It was common for those just setting out on the self-employed journey to not make pension contributions whilst they build their businesses, but the longer they earn and the more they earn, the more likely they are to start and continue to contribute to their pension.
The IFS report states that over 60% of those who had been self-employed for more than seven years were saving in a pension in 1998/99; by 2018/19, it was 23%. The length of time spent in self-employment is making less of an impact on pension contributions too.
In 1998/99, those who had been self-employed for more than seven years were 28% more likely to save into a pension than those who had been self-employed for seven years or less. However, by 2018/19 they were only 14% more likely.
Those who are self-employed may find tying up funds in pensions too risky in the current climate, but the IFS report explains that the decline in pensions savings has happened alongside the decline in savings in other wrappers too, such as ISAs or shares. The structure of pensions may not be the issue after all.
Pensions are something that we should all be considering, especially those who have fluctuating earnings, such as the self-employed. Yet, there is little that can be done to force the self-employed to save into their pension in the same way as auto-enrolment encourages contributions to workplace pensions. Ideas have been floated in the past – such as increased taxation or national insurance – in order to build retirement funds for the self-employed, but both those options remove the freedom that many who are self-employed signed up to in the first place.
The current regimes of annual allowances may also be an issue for the self-employed, in particular the need to make regular ongoing pension contributions in order to utilise allowances before they are lost, as well as the limits on tax relief within the year in which the contribution is made. If you don’t have a regular level of income each year, in the years that you make good profits you will need to make larger pension contributions. This may not be feasible until the following year once your accounts are finalised, but profits may have dropped that year severely restricting what you can pay. This is one of the flaws in the current regime that caters better for those in employment with more regular level of income.
Many are aware of the benefit of having a pension at retirement, and that there will be a lack of funds if they don’t make contributions. The IFA states that in 2006/7, 56% of the self-employed expected to receive personal pension income, with this dropping to 45% by 2017/18. Interestingly, this is increasing among those that are employed, which can surely be put down to the high proportion who have been auto-enrolled.
It isn’t clear, however, if self-employed people are fully aware of the benefits of making pension contributions on their income now. They will, in many cases, happily pay an accountant to process their tax return but most accountants won’t get into the realms of tax advice, such as increasing or making contributions to claw back a lost personal allowance or to avoid the child benefit tax charge.
Advice on pensions and other areas of tax-efficient savings can add real value to the self-employed, but many will be thinking that they are getting this kind of advice from their accountants. Advisers that work with accountants and other professional connections are best placed to help diffuse the timebomb of the lack of savings for the self-employed.
Claire Trott is head of pensions strategy at St. James’s Place Group