Paul MacKenzie-Cummins is 51 and has not saved a penny into a pension. He didn’t opt into a workplace pension scheme in the early stages of his career and, when he went freelance in 2006, saving for retirement was not a priority.
“In my twenties and thirties, I didn’t care about a pension. I had 40 or 50 years until retirement and wanted to keep money in my bank account, get a house and enjoy life,” said MacKenzie-Cummins, from Crowthorne in Berkshire. “Then I went freelance and committing money to a pension while my income levels were up and down wasn’t a priority.”
MacKenzie-Cummins is not alone. There are 4.25 million self-employed people in the UK, according to the latest figures from the Office for National Statistics (ONS). While auto-enrolment — which automatically signs you up to your employer’s pension scheme — has spurred millions of workers into saving for retirement, it does not apply to those who are self-employed.
A survey of 5,000 self-employed workers by the wealth manager Interactive Investor found that 76 per cent were not saving into a pension. Of these, 38 per cent had never saved into a pension, and another 38 per cent had a workplace pension from a previous job but were not saving anything now.
“The self-employed are far more at risk of poverty in retirement than other workers because they don’t get employer pension contributions,” said Mike Clancy from Prospect Union, which represents self-employed people in the creative industries. “The pension system needs to be reformed to prevent a future retirement disaster for self-employed workers.”
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Why are the self-employed not saving?
Since MacKenzie-Cummins set up his communications company Clearly PR in 2014, he has invested every available penny back into the business. He aims to stop working in nine years when he is 60, and to fund his retirement by selling the business. But he has started to have doubts about his plan.
“Any new employee gets auto-enrolled into the company pension scheme, yet I haven’t done this for myself,” he said. “I think: am I doing the right thing here? Have I taken too much of a risk?”
Just 20 per cent of self-employed people were saving into a pension between April 2018 and March 2020, compared with 80 per cent of employed workers, the ONS said. Self-employed workers aged between 55 and 65 had an average pension pot of £16,100, while employed workers of the same age had an average of £91,400.
Since 2012 any employee aged 22 and over and earning more than £10,000 a year is automatically enrolled into their workplace pension, where they contribute a minimum of 5 per cent of their annual salary and their employer pays in 3 per cent.
But there is no such scheme for the self-employed, the onus is on them to set up their own pension. These workers may find it harder to build up a decent pot without employer’s contributions and many may also be reluctant to lock their savings away — you cannot access a private pension until you are 55, and that is rising to 57 from 2028. If your self-employed income can be erratic, you may be reluctant to put aside money that you cannot touch in lean years.
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While there are plans to expand auto-enrolment to younger workers and lower earners, there is no plan to include the self-employed. “All the public policy thinking on later life saving seems to ignore the self-employed, despite them making up about 13 per cent of the labour market,” said Andrew Chamberlain from the Association of Independent Professionals and the Self-Employed.
“We need products that are tailored to their unique needs.”
• I’m 54 and have £500,000 in cash, can I retire?
Should I bother?
The short answer is yes. The tax relief you get on your pension contributions coupled with investment growth could make a big difference by the time you reach retirement — so start now.
A 35-year-old who starts saving £100 a month would have £50,000 by the time they reach retirement age, according to the wealth manager Hargreaves Lansdown, assuming investment growth of 5 per cent a year and annual fees of 1 per cent. If you started at 45 you could build a pot worth £32,000, while starting at 55 could give you £15,500.
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Rather than saving a set amount, Rory Brand from the financial advice firm Johnston Carmichael suggests mimicking auto-enrolment: “Put aside 8 per cent of your earnings as a minimum, but you should try to do more. You can always scale back your contributions if it feels too much.”
Tax relief can make saving more manageable. If you are a basic-rate taxpayer then an £80 pension contribution is topped up to £100 by the government.
The Pensions and Lifetime Savings Association, an industry body, estimates that a single person with no housing costs needs £43,100 post-tax income a year for a comfortable lifestyle in retirement, which includes money for luxuries such as several holidays a year and regular beauty treatments. A couple would need £59,000 a year after tax between them.
Your state pension will account for some of this — it pays up to £11,500 a year.
• Times Money Mentor’s pick of the best Sipp providers
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How to get started
You can open a personal pension with a company such as Aviva, Scottish Widows or the government-run Nest scheme. These offer a range of ready-made investment portfolios depending on how much risk you want to take. Charges are usually about 0.25-0.75 per cent of your investment, but check this carefully because high fees will eat into your savings.
If you want more control over your investments, a self-invested personal pension (Sipp) could be a better idea. These are available through online firms such as AJ Bell or Hargreaves Lansdown, which take an annual fee on top of the charges for your investments. How you set up your pension will depend on whether you are a sole trader, in a partnership or an employee of your company.
You can save up to £60,000 a year into a pension or 100 per cent of your annual earnings, whichever is lower, and get tax relief on your contributions. You can also carry forward any unused annual allowances from the previous three tax years. Basic-rate tax relief is applied automatically, but higher and additional-rate taxpayers can claim extra through their self-assessment tax return.
If you operate as a company, you can either make personal contributions to your pension pot, or contributions from your company. If you opt for the latter, you won’t get tax relief on your contributions, however it coould reduce the company’s profits for tax purposes. It is best to take professional advice to make sure you don’t fall foul of any tax rules.
Other ways to save
A Lifetime Isa lets you save £4,000 a year and gives you a 25 per cent bonus on your savings from the government. If you use the money for anything other than buying a first home worth up to £450,000, or after the age of 60, however, you will pay a 25 per cent penalty that effectively forfeits the bonus, and some of your savings. The bonus is equivalent to an employer pension contribution so it is a good alternative for the self-employed.
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Make use of the rest of your annual £20,000 Isa allowance too. All gains in these accounts are tax-free for life and can be accessed easily.
