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Can a Lifetime ISA help self-employed workers save for retirement?

Pension auto-enrolment has got millions of workers saving for their retirement for the first time, but those who are self-employed are lagging behind. Read our article to see how a Lifetime ISA could help self-employed workers save for retirement.

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The number of self-employed workers in the UK has increased by 23% over the past decade to 4.7 million. And while over 13 million Brits are now actively making contributions to their pension pots, just 13% of people who are self-employed are currently saving for retirement. The total annual pension contributions of self-employed workers are less than half of the 2007/08 peak of £3.5 billion, despite there being many more of them.

No auto-enrolment for the self-employed could spell disaster

The increasing popularity of the so-called ‘gig economy’ means the number of self-employed workers in the UK is only set to grow. But millions of these people could face problems in the future if they don’t start saving for their retirement.

There has been talk in recent months about whether the Government’s auto-enrolment scheme should widen its scope to include the self-employed. Suggestions have included incorporating it into annual tax returns, for example, to encourage those without a company scheme to think about the future.

In the meantime, there may be another way of saving towards retirement provided by the Lifetime ISA.

How a Lifetime ISA could help the self-employed fund retirement

A Lifetime ISA account can be opened by those aged between 18 and 39, and contributions can be made until age 50. Savers can currently put up to £4,000 a year into the account. The major bonus which these ISAs have over others is that the Government will top up the amount saved by 25%, up to £1,000 per year currently.

It means that those who open an account at age 18 and save the current maximum amount each year could receive a total of £32,000 in contributions from the Government by the time they reach age 50. As well as that, any gains on money invested through cash accounts are tax-free, and tax-efficient for stocks and shares accounts. Tax treatment can change however and is dependent on individual circumstances.

Can a Lifetime ISA help self-employed workers?

The Lifetime ISA is one option available to self-employed workers, but should not be considered an alternative to a pension. Those workers who are reluctant to tie their money up for the long-term may well be attracted to these accounts because of the option to withdraw cash before age 60.

However this is not the intended use of the Lifetime ISA and consequently unless the money is used for a first house purchase, or withdrawn after the saver is 60, it is subject to a charge of 25% on the amount withdrawn. This effectively wipes out the Government’s contribution and means savers can get back less than they paid in.

There are limitations to the Lifetime ISA, though. The annual contribution limit of £4,000 pales in comparison to current pension annual allowance of £40,000, and could severely restrict saving. It’s a major drawback for anyone trying to amass enough to ensure a comfortable retirement. There are hopes that the Government may increase the limits on the Lifetime ISA in the coming years, to make them a more viable vehicle for larger saving pots.

For that reason alone, a Lifetime ISA should not be considered a replacement for a pension – instead it can be used to ‘top-up’ your retirement savings pot.

What other options do self-employed savers have?

There are other options available for those self-employed workers wishing to save towards their retirement. A self-invested personal pension (SIPP) has the contribution allowances of other pension products and allows savers to continue contributing to their pot past the age of 50.

It’s an important consideration, as this is an age when many savers start to ramp up their contribution levels. It’s a point in life where they may have paid off their mortgage and seen their children leave home (or, increasingly, living at home while paying rent), and when they are likely to be at their peak earnings level.

These accounts can be opened easily online and allow individuals to choose where to invest their retirement savings. While there is no bonus from the Government in the form of a top-up, money saved into the account will receive tax relief. Basic rate taxpayers get an automatic relief of 20 per cent, while higher and additional rate taxpayers can claim back a further 20% on top of this.

SIPPs also offer more options as to how you are able to withdraw your money, with the chance to take a 25% tax-free lump sum, the possibility of flexible drawdown or the ability to buy an annuity for a guaranteed annual income. Currently money can be withdrawn from a SIPP from age 55, rising to age 58 in 2028.

So how can you save for retirement as a self-employed worker?

There is no right answer for self-employed workers, and many may choose a more flexible approach – using a mixture of products to meet their own personal needs.

Key considerations for those saving include what your tax position is, how much you are able to save, and how much flexibility you want both while you are saving and when you come to withdraw your money. But the most important thing is to start saving.


Written by Holly Black – Financial Journalist

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 decisions. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.