Flexibility key for self-employed savings

You may have seen headlines recently about the pension savings ‘crisis’ of the self-employed. According to the latest Financial Resources survey from the DWP, only 18% of working-age adults who are self-employed are currently participating in a pension. This is compared to 75% of employees of the same age.

Some of this difference is, of course, down to the success of auto enrolment, which has significantly boosted take-up for employees. However, there is more to the disparity than auto enrolment alone.

The Institute for Fiscal Studies (IFS) R181 report* looks at what’s been going on with the self-employed and savings – in pensions and other vehicles. In 1998, the difference in pension take-up between the self-employed and employed wasn’t anywhere near as pronounced as today. 48% of self-employed were actively contributing to a pension, whereas around 64% of employees were. So the shift to the 18%/75% we have now is significant and the figures show the gap was growing long before auto enrolment.

The IFS looked at other ways of saving and found a similar picture, so it’s not that pensions are being snubbed in favour of ISAs, savings or dealing accounts. The only savings that had gone up were in relation to home ownership due to the increased costs involved, but this is true for the employed as well, and this group’s savings rate hasn’t declined in as dramatic a fashion. The changing demographic of the self-employed over the period doesn’t explain the disparity either.

Relatively speaking, income for the self-employed has declined, and affordability is still the main barrier for many. However, the highest earning self-employed were those whose savings rate had dropped the most.

One factor not examined by the IFS as to why this group is not choosing to save more is income volatility. And for a self-employed individual with volatile income, flexibility will be important.

For example, tax relief will be important to higher earners, but also the ability to start and stop contributions as appropriate. Carry forward may also be very useful in mopping up any unused annual allowance in good years and reducing contributions when needed. Younger clients may want to consider using a Lifetime ISA for some of their saving. For basic rate taxpayers, the bonus is the same as tax relief in a pension, and in an emergency they can still get their funds out at any time, albeit with a penalty for doing so.

Guy Opperman has stated that the Government is committed to increasing retirement savings amongst the self-employed but acknowledges there is no straightforward way to do this. The DWP has been working with Nest insights on email trials and is now developing technology-based tools to make it easier for the self-employed to save, with trials expected to start in the summer.

In the meantime, we can all help get the message out on flexible saving.

*ifs.org.uk/uploads/R181-retirement-saving-of-the-self-employed.pdf

This article was previously published by Sipps Professional