Working for yourself can be hugely rewarding, but it also brings a whole load of additional responsibilities -- one of which is planning your financial future without the safety net of automatic enrolment.
Yet many self-employed people are not doing enough to ensure they will have a comfortable retirement when the time comes to stop working, new research suggests.
While automatic enrolment has significantly increased pension saving among employees, the proportion of working-age self-employed saving in a private pension has fallen considerably over the last two decades, from 48% in 1998 to just 16% by 2018, the Institute for Fiscal Studies (IFS) found. This suggests there are currently over 3½ million working age self-employed who are not saving in a private pension.
A closer look at the findings shows that participation has fallen even more dramatically among those who have been self-employed for longer and those with higher levels of income:
- Nearly 70% of the self-employed who were earning over £500 per week were saving in a pension in 1998-99, compared to 24% by 2018-19.
- Over 60% of those who had been self-employed for more than seven years were saving in a pension until 1998-99, but by 2018-19 this was down to just 23%.
These people in particular will need to save privately for retirement on top of the state pension to avoid falls in their standard of living when they stop work, Heidi Karjalainen, a research economist at IFS, pointed out.
A declining proportion of the self-employed expect to get any private pension income in retirement -- but at the same time, the self-employed tend to be less likely than other workers to build up entitlement towards the state pension. In 2016 almost one in five (19%) self-employed workers did not accrue entitlement towards the state pension (because their earnings were too low and they were not in receipt of certain qualifying benefits), compared with 5% of employees.
Worryingly, it does not appear that other financial assets are acting as a substitute for pension saving among the self-employed. The proportion of individuals saving in a pension, savings account, ISA or shares has been declining over the last 20 years, and more rapidly for the self-employed than for employees.
And trends in owner-occupation rates and average housing wealth are similar between employees and the self-employed, suggesting that saving in primary housing cannot explain the faster decline in the proportion saving in a pension among the self-employed than among employees.
"Given that other financial assets do not seem to be acting as a substitute for pension saving, policymakers are right to be concerned about these trends and to be considering how to make it easier -- and to encourage -- the self-employed to save more," Karjalainen said.
If you're self-employed and want to start planning your finances for retirement, Fidelius can help.
We believe in looking at the whole picture to really understand all aspects of your life and finances. Then once we know where you are, and where you want to go, we can give you really informed and tailored advice to help you achieve your goals and secure your future. Get in touch with us today to find out more.