Five reasons why the self-employed have a pension crisis –
Not having enough money saved REMAINS the biggest issue affecting our retirement prosperity and whilst Workplace pensions will go some way towards sorting out the problem, we still have a long way to go.
The biggest group of people out of the loop when it comes to Workplace pension are the self-employed.
The government may introduce some form of automatic pension saving for the self-employed workforce, however, the self-employed are growing rapidly and it may come too late for many – more than a million people have become self-employed in the last 10 years, since the ‘credit crunch’.
A recent government survey of around 90,000 people have found some interesting facts about the self-employed and their retirement plans.
Self-employed don’t use pensions
Or at least not as much they should be. Estimates vary but analysis indicates as little as 12% are actively investing in a pension.
This means that they miss out on valuable tax relief and investment growth. Many of them are instead risking their retirement savings in the buy-to-let property market – a market that is under considerable legislative pressure, which does not look like will be changing any time soon. The research shows that among 35-49 year olds, 25% of self-employed people have a buy-to-let, compared with less than 10% of the employed.
They have a different attitude to saving for retirement
The self-employed have a general disaffection when it comes to traditional retirement planning and that is probably putting it politely.
More than half (53%) think property is most likely to deliver the best returns. And 43% describe property as the ‘safest’ savings vehicle, while just 25% cite pensions as the most secure.
In comparison, among the employed the figures are reversed. More than half (52%) see pensions as the safest vehicle for retirement saving and just 25% favour property.
Interestingly, the evidence suggests that where they have had a workplace pension in the past through a spell of employment, they are more likely to continue saving for retirement in this way.
Half a million have an existing workplace pension
Around half a million self-employed people already have an existing pension from a period of work, having recently become self-employed. HOWEVER, as people continue to move between employment and self-employment, that number is set to increase.
Many are likely to fall out of pension saving simply through inertia, as pensions and retirement planning are rarely regarded as a priority when moving from a steady income to self-employment. However, if the self-employed can be encouraged to continue to save for their retirement and the idea of retirement saving, there is a great opportunity to build a retirement fund privately.
Unfortunately, they procrastinate
Unfortunately, some of the self-employed are not saving into a pension and when they do they are more likely to delay starting. The research shows that pension savers among the self-employed suffer from what is often referred to as the ‘decade of delay’.
For example, the typical employed person aged 35-40 has £11,500 saved in pensions. The self-employed do not reach a similar figure (£11,000) until they are 45-50 years old.
It means they miss out on the benefits of investing over time and will ultimately need to close the gap by pay in more into their retirement plans or reduce their expectations in retirement.
Not as many self-employed people are genuine entrepreneurs
The research has also shown that the self-employed were under-saving for their retirement, as many are working very hard to build value in their business as an alternative retirement planning strategy.
However, only 7% of the 5 million self-employed believe their business will be their main source of retirement income. The finding is backed-up by the government’s own data analysis, which shows sole proprietors are in decline. It dispels the idea that the self-employed can substitute the value in their business in place of a conventional retirement plan.
That said, there is a risk that the business-owning self-employed are encouraged to invest in pensions if the government expands Workplace pensions, too late in the day and unfortunately do not enjoy a secure retirement.
Action Call
Self-employed? Behind the curve with your retirement plan? Got pensions from previous employment that you don’t know what they are doing?
Now may be the time to start to consider where you are right now, where you want to get to and when. Working out what you need to do next could just be what you need to put on your ‘to do list’ for the coming year ahead.
If you would like to talk to about financial planning, please get in touch for a no-obligation meeting. Go to our website www.miadvice.co.uk and contact us via our “Get in touch” form on our home page or Contact Martin Dodd on 01902 742221.
Email us at [email protected]
It is advisable to take advice from a professional financial adviser when making major financial planning decisions.
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This article has been prepared in good faith and based on Midlands Investment Agency’s understanding of the law and interpretation thereof at the time of creation. The contents should not be regarded as specific advice and we always recommend that specific advice is sort from a qualified professional. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.
