Auto-enrolment has got millions of workers saving for retirement, but the self-employed are still woefully underprepared.
Latest Government figures show almost 40 million UK workers are now part of a pension scheme – up 17% since 2015. Some 13.5 million Brits are actively making contributions to their retirement savings.
Yet just 12% of the 5 million self-employed people in the UK are currently saving into a pension. The annual pension contribution from these workers is still less than half than its 2007/08 peak of £3.5 billion.
This situation is only set to worsen as more people decide to forgo working for a company to go it alone; the number of self-employed people in the UK has already increased by 23% over the past decade.
John Lawson, head of policy at Aviva, said: “The lack of retirement provision among the self-employed is reaching crisis levels. While automatic enrolment has helped reverse declining participation among employees, the situation for self-employed workers remains dire.”
While there is some debate about how auto-enrolment can be expanded to include the self-employed, for those looking to start saving now there are already a number of options.
A self-invested personal pension, or Sipp, is a retirement savings account you can open easily online through a fund supermarket in the same way you would open a stocks and shares Isa.
Investors pay an annual fee to the fund supermarket and select funds or stocks in which to invest. Money saved into the account gets tax relief, with the government automatically adding 20% to anything paid in. Higher and additional-rate taxpayers can claim back a further 20% or 25% too.
Investors who do not feel comfortable picking their own selection of investments can also opt for a personal pension account with a provider. These let you save into a default fund or simplified selection of funds.
Sean McCann, chartered financial planner at NFU Mutual, said: “Sipps can have higher charges than a standard personal pension and there is little point in paying for the extra options it offers unless you’re going to use them.”
But for those savers looking for more flexibility, this year’s launch of the new Lifetime Isa (Lisa) has created a new opportunity.
The Lisa can be opened by anyone aged between 18 and 39, and contributions can be made until the age of 50.
Savers can put up to £4,000 a year into the account, which the Government will top up by 25%. Those who open an account at age 18 and save the maximum amount each year could receive a total of £32,000 in contributions from the Government. And any gains on money invested through the account are tax-free.
However, any money withdrawn from the account before age 60 is subject a to a charge of 25% - unless it is for a house purchase - which effectively wipes out the Government’s contribution. That compares with a Sipp, where money can be withdrawn at age 55 – though in 2028 this will rise to age 58.
Richard Stone, chief executive at The Share Centre, said: “The flexibility of the Lisa is a good thing. In theory your money is locked away but you have the ability to access it if you really need to and don’t mind taking the 25% hit.”
But he is concerned by the limitations on how much you can save into a Lisa; it’s a major drawback for anyone trying to amass enough for a comfortable retirement.
The maximum you would be able to save into a Lisa at under the current contribution limits, including the Government top-up, is £160,000. The contribution limits are much higher on a Sipp at £40,000 a year, with a lifetime allowance of £1 million.
Sipps also do not limit you to only making contributions until age 50 - an age where, in theory, mortgages are paid off and children have flown the next - many investors start to ramp up their contribution levels.
There are hopes, however, that in time the Government will raise the annual contribution limit as it has done with other Isa accounts.
While Sipps offer more options in how you are able to withdraw your money, with a 25% tax free lump sum and the possibility of flexible drawdown, a major downside to them is the uncertainty around the future of pensions.
Stone said: “The trouble with saving into a pension is you are locking your money away without really knowing what the policy is going to be when you come to withdraw it.”
He thinks many younger savers will be more inclined to move away from pension products in favour of Isas, which seem to be better favoured and protected by Government.
McCann added: “There is no ‘right answer’ for the self-employed but there are key things to consider such as how old you are, what your tax position is and how much flexibility you want.”
There is much debate about how auto-enrolment could be expanded to include the self-employed, with the possibility of contributions being made through the annual self-assessment tax return process. But some experts say that, for now, the focus needs to be on education rather than introducing yet more changes.
Stone said: “I think the Government has done a lot to encourage saving and innovate with new products. The key now is educating people as to its importance.”
