Self-employed and not saving for a pension? Read this

If you are self-employed the chances are you could be heading for retirement with little money. New research has revealed that most people who work for themselves don’t have pension savings.

What’s the problem?

Research by Drewberry has found that three quarters of the nation’s self-employed workers have no personal pension. Of the 25 per cent who are putting money aside for their retirement more than half had no idea how much they had saved and a whopping 91 per cent were contributing ten per cent or less of their take home pay to their pension.

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How has that happened?

“Last year, our survey clearly identified that the growth of the ‘gig economy’ meant that Britain’s self-employed were fast becoming a ‘financial underclass'," says Tom Conner, director of Drewberry in FTAdviser.

“Today, the average self-employed Briton has far less discretionary income available each month than their employed counterparts with over 70 per cent of self-employed respondents currently having £200 or less a month after meeting their regular outgoings.”

With so little left it is hardly surprising that saving for retirement is being put on the back burner by the vast majority of the self-employed.

Another problem is many self-employed workers are making assumptions about how they will cope with funding later life.

“People have the belief that the self-employed will keep working into later life, making the need for pension savings redundant,” says Martin Bamford, a chartered financial planner with Informed Choice, in The Times.

“Some also have grand ideas about selling businesses for large amounts of capital – we need to robustly challenge these assumptions.”

What could the government do about it?

The government commissioned a review to look into the problem and it has conclude that self-employed workers should be ‘auto-enrolled’ into pensions in order to force them to save for retirement, as has been happening for the last few years for employed workers.

“It has been the view of the pensions industry for some time that the growing army of self-employed workers without a pension should be brought into auto-enrolment,” says Malcolm McLean, senior consultant at Barnett Waddingham, in Moneywise.

“Surely the question now is not if this should happen, but how and when it can be best achieved.”

In order to sweeten the pill of forcing the self-employed to contribute to pensions it has also been suggested that the government should provide extra top-ups.

“There should be a specified four per cent contribution rate plus one per cent tax relief,” says McLean.

“A further cash top-up from the government in lieu, as it were of a separate employer contribution – the self-employed, of course, are their own employer – is also worthy of consideration.”

What should I do about it?

If you are self-employed and aren’t saving for retirement don’t wait for the government to force you to set up a pension. The earlier you start saving for your retirement the less you’ll need to sacrifice from your income to build up a decent pension pot.

“The long-term nature of a pension means that there’s a huge ‘opportunity cost’ to starting a pension later in life,” says Connor.

“In a recent exercise, we calculated that someone who starts a pension at age 25 will have around twice the pension pot at age 65 of someone who waits until they’re 35 and four times as much as someone who doesn’t start until they’re 45 years old.”

If you have left if later then try to save as much as you can afford to. A general rule of thumb for how much of your income you should set aside is half your age from when you start saving. So, if you started saving for retirement at 30 save 15% of your income, but if you wait until 40 up it to 20%.