Like many entrepreneurs, Caroline Dabney-Rourke has no private pension provision. Following a career change a decade ago, the 59-year-old from West Sussex runs AllezNutrition, a mobile catering company for cyclists. To fund her retirement at 64, she relies on income from a buy-to-let property, to which she can add a full state pension from age 67.
Recently, though, the profit she gets from the property has picked up something of a slow puncture.
“Over the years the rents have increased but I’m in a bit of a trap because of increased mortgage costs. My mortgage has gone up [by] almost three times, so the margin is not as great.”
Although she still thinks she’ll have a comfortable retirement, she hopes interest rates will be lower in 18 months, when she plans to refinance.
Dabney-Rourke is one of the growing number of people in self-employment in the UK — up by more than a third since the beginning of the 21st century to 4.3mn. While there’s much to celebrate in the boom in entrepreneurship, when it comes to retirement planning, self-employed people are at a significant disadvantage as they do not benefit from auto-enrolment or employer contributions to their pension pot.
A report this week from pension provider Scottish Widows found that four in 10 self-employed people are not on track for even a minimum standard of retirement lifestyle — which, according to the Retirement Living Standards, based on research by Loughborough University, is £14,400 a year for a single person.
That includes the state pension, available from 66, rising to 67 in 2028, which is currently £11,502 a year, if you have a full record of national insurance contributions. It’s not to be sniffed at — to buy an £11,500 index-linked pension would cost between £250,000 and £300,000 from an insurance company, says Richard Parkin, head of retirement at BNY Mellon Asset Management — but is hardly enough to live in comfort. Only 28 per cent of self-employed workers are on course for a “comfortable” retirement — considered to be £43,100 a year for a single person — compared to 41 per cent of full-time employees.
“The hidden underside of a choice to go self-employed can be a scary lack of long-term financial security,” says Becky O’Connor, director of public affairs at PensionBee. “Without the cushion of employee benefits, such as workplace pension schemes, life insurance and private medical insurance, self-employed people can find themselves reliant on good fortune, hoping week to week that nothing goes wrong.”
Experts agree that self-employed workers in the UK face an almighty pensions squeeze in the coming decades. So what’s causing it? And what can savers do now to relieve the pressure on their own retirement?
Ask an entrepreneur about their retirement planning and they may reply with a hollow laugh. With the pressures of keeping a business afloat from month to month, saving into a pension pot can fall down the list of priorities.
“Running a business can feel overwhelming and means wearing many hats,” says Jackie Leiper, managing director of pensions at Lloyds Bank. “It’s difficult to find time to think about long-term saving, which means today only two in 10 self-employed people contribute into a personal pension.”
Grant Hutton, chartered financial planner at Hunter Wealth Management, became a self-employed independent financial adviser (IFA) at 31 in 2016, while also a new parent. “I had no guaranteed income and although looking back I always made enough each month, it was tough psychologically to lock a few hundred pounds away knowing you couldn’t get it if you suddenly had a few quiet months,” he says.
Many opt for Isas instead, says Craig Rickman, personal finance expert at Interactive Investor. “Isas have obvious appeal for the self-employed as they can access the money before retirement without any tax implications should they encounter any cash flow problems.”
Amanda Walls, 37, who runs Cedarwood Digital, a marketing agency, says: “I’ve never been a huge fan of pensions — predominantly because of the lock-in until 55.” She prefers a mix of investments, held in a stocks and shares Isa, and property. “For me, property is something which is tangible and over time will generally increase in value while also providing accessible cash if for instance I did need it,” she says.
It’s a common attitude among self-employed people, but it’s not necessarily advisable. Property investment is less tax efficient than pensions; tenants can be difficult to manage; capital gains are uncertain — in some parts of the UK, house prices have yet to recover to 2007 levels after adjusting for inflation — and properties can be subject to capital gains tax when you sell.
For self-employed women raising children, pension planning can be even more difficult. Joanna Drake, founder of independent communications consultancy Rosebud Media, fell into what she describes as the “typical female pensions gap”. She paid in diligently during her 20s but in her early 30s began working for a business without a pension scheme and never got around to setting up a personal pot. “Throw in two maternity leaves and the financial pressures of having small children, and I eventually ended up going almost 10 years without paying into a pension scheme,” she says.
Selling a business is often the fallback retirement plan for the self-employed, but this can be a fraught choice, says Parkin. “If your business is highly reliant on you as an individual, I would question what value it has if you step away from it. You might be able to sell the client list but will that realise the value?” he says.
“Pensions remain the most attractive way of saving for retirement,” says Parkin. “Particularly if you’re a higher-rate taxpayer while working and then [intend to] pay 20 per cent in retirement.”
Basic rate taxpayers get a 20 per cent tax relief — equivalent to a 25 per cent boost from HMRC. Higher and additional rate taxpayers can then claim back an extra 20 or 25 per cent respectively through self-assessment. Meaning that, to make a £100 pension contribution, it would cost a basic rate payer £80; a higher-rate tax payer £60; and an additional rate payer £55.
When it comes to retirement, 25 per cent of the fund can be withdrawn free of tax.
There may be more advantages for those who have set up their businesses as limited companies, because as directors they can make employer contributions into their pension, typically a self-invested personal pension (Sipp) or a personal pension offered by a provider.
“Since pension contributions can count as an allowable expense, savers can usually deduct them when they’re working out their business’s taxable profits,” says O’Connor. “They also don’t usually have to pay national insurance on pension contributions, so they could save a total of 33.8 per cent tax when they pay money from their company into their pension.”
The real challenge for the self-employed is understanding what they can afford to pay in. As an employee, combining your and your employer’s contributions, you would pay in 8 per cent of your gross salary as a minimum via auto-enrolment — but this is generally considered to be too low. The best pension schemes put in 15 per cent.
If someone was starting from scratch at age 40 with a Sipp or personal pension, an IFA would probably tell them to put in 20 per cent to be sure of a comfortable retirement.
Alex (not his real name) is 40 and has paid £250 into a pension every month from when he went freelance at 25.
He says he has a “gnawing, low-level anxiety” about whether he’s saving enough. His advice to other freelancers is: “Consider what you can reasonably pay into it each month and then add 20 per cent. You spend what’s in your account anyway, but if it’s not in there you won’t miss it.”
If you’re struggling to find enough spare cash to pay into a pension, there may still be action to take. “A useful exercise is to round up any old occupational and private pensions and consider consolidating them where appropriate,” says Rickman. “Bringing several pots under one roof can reduce your fees, give rise to a wider suite of investment options, and make things much easier to manage and plan for old age.”
While accountants can be helpful on how much to lock away and commit for the long term in a pension, they might not be so helpful on what pension to take out. For that you will need an IFA — though these can be expensive, particularly if your business is just getting going or in a difficult period.
Many find a pension provider through internet search. Alex chose his pension using a comparison site and went with the brand name that he trusted most. However, he says: “The pension I originally opened doesn’t exist any more and it has been rolled up into a new company. That makes me anxious. I worry it’s not the best pension for me any more.” So be prepared to move it and watch out for high charges.
Pension provider Penfold specialises in savings for the self-employed, keeping it simple by including all costs and charges inside a single annual fee, which includes a 0.17 per cent fund management fee to BlackRock. But the Penfold pension is still relatively expensive, charging 0.75 per cent for savings up to £100,000, and 0.4 per cent on any amount of more than £100,000.
Lloyds bank has launched a Ready Made Pension, with an account fee of 0.3 per cent plus a 0.24 per cent investment charge and 0.14 per cent transaction costs for the investments.
Some of the big investment platforms such as AJ Bell and Interactive Investor, which have beginner pension options, are much cheaper. But Parkin advises: “Don’t agonise too much around who you choose. Your mantra should be just to put in as much as you can.”
Self-employed people can now sign up to the big master pension trusts, such as Nest Pensions. The government set up Nest, the National Employment Savings Trust, in the early 2010s to help deliver its auto-enrolment programme. But Parkin cautions: “The idea that master trusts are cheap is not true.”
Nest charges 1.8 per cent on each new contribution into your pot, plus an annual management charge of 0.3 per cent on the total value of your pot each year. So if you paid £10,000 into your pot over the year, your total charge would be £210.
More support is needed to help the self-employed save for their retirement. A survey by Saltus, a wealth manager, found self-employed wealthy individuals say the most useful change would be a further increase to the annual allowance, the maximum gross amount of total pension savings you can make each year without incurring a tax charge. This went up from £40,000 to £60,000 in April 2023.
However, others think more radical change is needed. Pete Glancy, head of pensions policy at Scottish Widows, says: “While the current auto enrolment model wouldn’t be suitable for the self-employed or gig economy, it’s critical that an equivalent system is designed and launched imminently to better support this growing cohort.”
The House of Commons work and pensions committee suggested auto-enrolling self-employed people through the tax system in May 2016 and revisited the idea in September 2022 with a recommendation that the government undertake a trial of ways to default self-employed people into pension saving. This included consulting on proposals which involved increasing national insurance paid by self-employed people, with the option for the increase to be paid instead into a pension.
However, in its response to the committee, the then government explained that it had been working on “prompts and nudges” trials with Nest Insight and that it was not considering automatically enrolling self-employed people via national insurance contributions.
Alastair Black, head of savings policy at asset manager Abrdn, believes one easy change would probably have a strong impact (at as little as zero cost). he would like to see pension contributions taken by the self-employed as a tax allowance at the point where they complete and submit their annual self-assessment.
He says: “This would put pension saving squarely in the middle of something that every self-employed worker will have to do — filing accounts — at a time when they are likely already thinking about how to use tax allowances.”
With a pension review under way, and millions of self-employed struggling with pensions, policymakers would do well to listen to all ideas on the table.
