While self-employment continues to rise and rise in the UK, it is mirrored by a steep slide in the numbers of own-account workers saving into a pension. According to government statistics less than 20 years ago 38% of self-employed men had no pension, now the number missing out has more than doubled to 78%. The RSA estimates a similar picture for women.
There are several reasons for this shift. For a start, self-employed incomes have reduced at the same time as pension contributions have fallen sharply: the new self-employed have less spare cash to put away. One third expect to rely entirely on the state pension when they retire.
A better deal on the state pension for the self employed
There is some good news for the self-employed: previously the self-employed could not access the second state pension, from 2015 a new level playing field was introduced for those who have made adequate National Insurance contributions for at least 30 years. But, it’s still not a lot and not likely to get any better.
For most of the self-employed there are also far fewer incentives to invest in a pension. Without an employers’ top-up the new stakeholder pensions don’t quite have the same attraction for the self-employed. Over a lifetime the average self-employed person misses out on an estimated £91,500 of employer contributions, according to the Prudential. With an eye on the long-term implications of a shifting labour market and aging population, those incentives are being provided by the state in some countries.
Difficulties accessing financial services
Accessing financial services in general can be a challenge for the self-employed, with 20% reporting that they could not get a mortgage due to their employment status. Not surprisingly there has been a growth in the number of specialist providers and brokers, who deal exclusively with freelancers and the self-employed.
Committing to regular pension contributions is another concern, especially when income can be lumpy. And while it’s becoming easier to access pension pots earlier, many self-employed people like the flexibility of being able to access their capital when and if their business or family needs it.
Alternative ways of saving for the future
For those reasons alternative investments, especially property and ISAs are popular with self-employed people. In fact, research from the RSA finds that, while self-employed people currently have lower incomes on average, they have approximately three times the wealth of employee-only householders. For many, squirrelling away a nest egg is what has enabled them to become self-employed.
But of course the down-side of flexible savings means that when economic or personal crises hit, they can be eaten away much more quickly. While it makes sense to have relevant insurances as a buffer in those situations, more that 70% of self-employed people do not have life insurance and over 90% are not covered for critical illness.
In the long-run, a pension is still more tax efficient and generally delivers a better rate of return than alternative savings vehicles. Pension incentives for the self-employed could be better, but on-balance having a pension as part of your retirement planning still makes sense.