Despite the prospect of a bigger State Pension, rates of pension saving among the self-employed point to the need for action.
Self-employed people are now entitled to a State Pension of up to £155.65 a week, compared with a maximum entitlement of £119.30 under the old system; an increase of £36.35 a week.
Under the old system, self-employed people were only entitled to the basic State Pension; they didn’t benefit from an earnings-related bonus like their employed counterparts. As a consequence, they missed out on the opportunity to boost their State Pension entitlement.
But everyone reaching State Pension age since 6 April 2016, has been entitled to £155.65 a week, so long as they have a 35-year history of NICs.
“This is arguably quite generous to the self-employed, who will have generally paid less in NICs into the system over the course of their careers,” says Ian Price, Divisional Director at St. James’s Place.
However, £155 a week is still a relatively modest income. If living standards in retirement are to be maintained, it is vital to save into a personal or occupational pension during your working life.
While rates of pension saving among the employed population have increased, there is evidence of a decade-long decline in pension saving among the self-employed. In 2003/04, some 1.1 million self-employed people were paying into a personal pension. But in 2013/14, that number had fallen by more than half to just 450,000.1
Given the lack of an equivalent to auto-enrolment, the government could be accused of failing to act to avert a collapse in rates of pension saving for the self-employed. While most of the employed population are nudged into making tax-relievable pension contributions, self-employed people are not.
One of the most significant disincentives that self-employed people face is, of course, the lack of an employer’s pension contribution. For the self-employed, the need to make the entire contribution yourself makes the task all the more forbidding.
Furthermore, research commissioned by Citizens Advice reveals widespread confusion about the tax breaks on offer through pension saving. That confusion extends to the employed too, but the issue is more salient for the self-employed; and potentially more challenging to overcome, since they are generally less likely to receive information about pensions.
The research shows that employees tend to lean heavily on their employer for information, but over a quarter of self-employed people say they have never received any information or advice about pensions from anyone.2
Given that self-employed people do not receive information about their savings options from an employer, it is vital that they receive information and advice from other trusted sources.
“It’s clear that the government has a role to play in channelling self-employed people towards appropriate sources of information and advice,” says Price.
Aside from the lack of engagement with pension saving, the changing nature of self-employment is also having a knock-on effect on retirement. For example, in the past, a self-employed person might have expected to sell their business to fund their retirement. But the self-employed are increasingly doing very similar jobs to employees, and are therefore much less likely to have a business to sell when they reach retirement.
As outlined earlier, the self-employed will benefit from improvements to the State Pension, but falling rates of pension saving suggests that many are facing retirement on very modest means, unless they take action.
“I would recommend that all self-employed people seek advice from a financial adviser to understand their options for saving for retirement,” says Price.
1 www.citizensadvice.co.uk, January 2016
2 www.citizensadvice.co.uk, survey conducted by YouGov on 9–15 November 2015
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