5 min read

Do self-employed workers get a pension?

One of the big attractions of working for yourself is the fact that you are in control and there is no employer or manager telling you what to do. But this autonomy can have its downsides, one of which relates to saving for retirement.

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Self-employed workers are responsible for setting up their own pension. They can do this privately or join schemes like Nest. An option introduced by the government in 2017 – the Lifetime Individual Savings Account (ISA) – could be a more flexible long-term saving option for many self-employed workers, if they can’t commit to a specific amount each month.

Over the past few years, a change in the law has meant that the vast majority of employees now have the right to be enrolled automatically into a workplace pension. The auto-enrolment programme, as it is known, does allow workers to opt out of their company pension, but the theory is that most people will remain in their firm’s scheme and pay in a small percentage of their salary – in addition to a contribution from their employer – every month.

Unfortunately, no such provision has been made for self-employed workers, and this group appears less and less likely to be making adequate financial provision for their later years.

Mind the savings gap

Official figures indicate that around nine million employees have joined a company pension scheme as a result of auto-enrolment. But its success has only served to highlight the gap in long-term savings rates between company workers and the almost five million self-employed people in the UK.

According to figures issued by the Office for National Statistics (ONS) earlier this year, levels of pension saving among the self-employed are worryingly low. Of those aged between 35 and 55, 45 per cent have no retirement savings at all. For the over-55s, the rate is still a dismal 30 per cent.

Overall, only around seven per cent are currently paying into a pension*. This widespread lack of saving has led to calls for the government to look at extending auto-enrolment to the self-employed. But although ministers have explored doing so, the current position – as set out in the official Auto-Enrolment Review published in December – is that the programme will remain limited to employees.

One of the biggest challenges involved in encouraging the self-employed to put money aside every month in a pension concerns the fact that, for a group which can often have unpredictable levels of income and uncertainty over future work flows, he idea of locking some of their cash up in a fund that can only be accessed after they turn 55 can be hard to accept. And sometimes unlikely on a financial level.

But saving for retirement doesn’t have to mean you have no access to your money if you were to need some of it in an emergency. A new option introduced by the government in 2017 – the Lifetime Individual Savings Account (ISA) – could be a more flexible long-term saving option for many self-employed workers, if they can’t commit to a specific amount each month.

The Lifetime ISA is available as both a cash product as well as stocks and shares. If you're considering the stocks and shares option bear in mind your capital is at risk. Due to market fluctuations the value of your investment could go down and well as up which means you could get back less than you put in.

How Lifetime ISAs work

Like other types of ISA, Lifetime ISAs offer tax advantages. These mean that any returns on investments held inside the ISA as well as any interest paid on cash deposits are free of tax. Tax treatment depends on individual circumstances and may be subject to change in the future.

But Lifetime ISAs differ in that they are limited to people aged 18 – 39 and are designed specifically to encourage saving for either a deposit on a home or for retirement. At present individuals can put up to £4,000 a year into a Lifetime ISA (until they turn 50), and any money that goes into it is eligible for a bonus payment of 25 per cent – up to a maximum of £1,000 annually – from the government.

The bonus is added until the saver turns 50 and is paid on top of any investment returns or interest payments. But if money is withdrawn before the age of 60 and not used to buy a first home, it is subject to a 25 per cent charge, which could mean you get back less than you invested.

Lifetime ISAs and pensions

Pensions also have tax benefits. Any contributions to a pension are eligible for tax relief, typically at 20 per cent (for basic-rate taxpayers) or 40 per cent (for higher-rate taxpayers). But pensions don’t qualify for any extra government bonus payment, and the money you take out of a pension is liable for income tax.

It's also important to note that money held in a Lifetime ISA could affect means tested benefits. So always consider how the product fits with your individual circumstances, before taking it out.

Under current rules, money in a pension isn’t normally available until the holder turns 55. With a Lifetime ISA, on the other hand, the cash can be accessed at any point. Although, as explained above, early withdrawals are subject to a 25% charge.

A Lifetime ISA shouldn't be considered a replacement for a pension. However, for younger self-employed workers who might worry about having their money tied up, the Lifetime ISA could be an attractive option.

Written by Chris Torney - Financial Journalist


*Source: Based on a calculation between the number of self-employed (ONS.gov Feb 2018) and the estimated number of personal pension contributions for the self-employed (ONS.gov Sept 2017)

Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don't rely on it when making financial decision. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.