23rd December 2015 at 12:15pm
With workers now being nudged into pension saving through auto-enrolment – are the self-employed being left behind?
With initiatives like auto-enrolment making pensions more accessible and mainstream, we are developing a new savings culture. Yet under these new rules, there is no obligation for the self-employed to save, and recent research would suggest they are falling behind.
Self-employment on the rise
According to research by insurer Prudential, the number of self-employed workers contributing to a private pension has fallen to 420,000 despite record growth in the number of people working for themselves.
Official figures now show 15 per cent of those ‘in employment’ are self-employed – with just over half of self-employed individuals aged 25-49 and a third aged 50-64. Everyone from taxi drivers to management consultants appear in these figures. So this lack of pension provision could prove a real issue in years to come.
A matter of perspective
While it might not be top of the list to think about, pensions and life insurance are two areas where self-employment can leave big gaps and could cause individuals and families problems ahead.
Work for a company, auto-enrolment means workplace pension savings are started for you, and all companies will offer this by 2018. And in most cases, your employer also adds money into your pension scheme for you, and you get a top up (known as tax relief) from the government of up to 25% depending upon the type of scheme.
But if you’re self-employed you’ll not see any of the benefits from auto-enrolment. You will be solely responsible for your own pension provision. There will be no employer contributions to help boost your retirement fund.
Still making sense
However, pensions still make sense. Start your own personal pension and you’ll still get tax breaks. Your own pension contributions do receive a boost in the form of tax relief. For every £100 you pay into your pension, HM Revenue and Customs will add another £25.
If you’re a higher or additional rate tax payer, there is additional tax relief to be claimed through your self-assessment return. This has the effect of reducing the amount of tax on your income that is subject to tax at the higher rates.
And that’s not the end of it. Paying a pension contribution can help maintain certain benefits and allowances, such as child benefit and the personal allowance. To find out how, it’s worth looking at our blog on retaining child benefit.
Preparation is everything
If you’re self-employed, saving into a pension can be a more difficult habit to develop than it is for people in employment. Without these employer contributions and irregular income patterns, regular saving can be difficult. But preparing for retirement is crucial for you too.
The earlier you start saving into a pension, the better. It gives you more time to contribute to your fund before retirement, more time to benefit from tax relief, and more time for growth in your fund’s value due to investment returns and the power of compounded returns.
Getting your priorities right
It’s all about priorities – if talented entrepreneurs apply their business head to their own family finances, they’ll really set themselves up for longer term success.
The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment and its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in December 2015. Your personal circumstances also have an impact on tax treatment.