Britain’s army of self-employed freelancers, contractors, business owners and sole traders has grown to more than five million over the past 10 years – but terrifyingly, 3.5 million of them are not saving into a pension at all.
This has left them out in the cold, as increasing numbers of people save at last something into a pension.
The policy of auto-enrolling all PAYE employees into a company pension means not only are they saving at least something towards their retirement, their employer is also contributing and they get the tax breaks on offer.
There are lots of options for the self-employed when it comes to saving into a pension, but if money is tight or income unpredictable or lumpy, then locking savings into a pension can seem impossible in the short-term.
There are benefits to making the effort to save into a pension when you’re self-employed
The long-term cost of this is high, however. Money not contributed into a pension doesn’t benefit from tax relief, automatic at the 20 per cent level of basic rate tax and stepping up to 40 per cent, then 45 per cent for the highest earners.
If money isn’t invested either, then savings are highly likely to be hit by the double whammy of value being eroded by inflation, at the same time as not benefiting from potential capital and income growth from being in the stock market long-term.
While the barriers are many, there are also benefits to making the effort to save into a pension when you’re self-employed.
AJ Bell’s Tom Selby: Pensions can also be used to lower your tax bill
This is Money asked AJ Bell’s Tom Selby for his top tips on saving into a pension when you’re self-employed and how to use it to save money on tax at the same time.
He says: Automatic enrolment has been successful in boosting pension participation among those who are employed but it does nothing for the UK’s five million self-employed workers.
With around one in seven self-employed people failing to make any retirement provision, there is a real risk we are storing up a future pensions crisis.
Relying on selling your home or your business to fund your retirement is hugely risky, leaving you a hostage to the fortunes of the housing market and the wider economy, both of which can both be volatile.
Below are my top tips on how to make the most of the pension benefits on offer.
Selby adds: While clearly coronavirus has left many self-employed people facing severe cuts to their incomes and therefore less able to save than they were before, at some point we all hope to return to something vaguely resembling ‘normal’.
When that happens and the UK’s army of self-employed workers are in a better position once again to consider long-term savings options, it is important they are helped to understand the choices available and the risks associated with doing nothing.
The good news is that not only are there a range of low-cost, simple options with generous upfront incentives available, but pensions can also be used to lower your tax bill too.