Being your own boss comes with many perks – but they may have little significance if you fail to save for your own retirement and find yourself struggling financially in later life.

The Government’s automatic enrolment scheme has nudged many employed people who were not saving for retirement in the right direction. However, the self-employed are effectively excluded.

Responsibility for pension provision lies solely with self-employed workers who it seems are seriously lacking in pension provision.

Research[1] shows that there are around 4.3 million self-employed people in the UK missing out on an estimated 4 billion in employer pension contributions a year.

This estimate is based on what self-employed people would probably receive from an employer if they were in employment, rather than working for themselves, and assumes they are missing out on employer contributions worth 3% (the auto-enrolment minimum) of gross salary. However in reality, many employers pay in more than this on behalf of staff.

The study claimed that four in five self-employed people are not putting any money in a pension at all.

Having a decent pension will give you choices when the time comes that you want to give up working. Even if you wish to continue working part-time you will need something to plug the gap, so you’ll need another source of income – and that is where a pension can come in.

The self-employed are entitled to all the same tax reliefs on pension contributions as employed people. The tax relief foregone by the self-employed[2] is estimated to be around 1 billion a year, according to estimates[3].

As a reminder, you get a tax top-up when you contribute to your retirement savings, at the rate of 20%, 40% or 45%. That means if a basic-rate taxpayer pays in  800, it will automatically turn into 1,000. It’s even more tax-efficient for higher-rate taxpayers who can claim back an additional  200 through a self-assessment form. It means your money can grow tax-free for decades.

Once you’ve got your pension set up you can choose to pay in regular amounts or a lump sum when you can afford it. As with any kind of pension, you cannot exceed the official annual limit of 40,000.

If you do exceed that limit, you won’t get tax relief on further pension savings. You can usually carry forward unused annual allowance from the previous three years, so there’s much tax to be saved if you’re not already contributing.

Problems with self-employed people and pensions also lie with those who had been paying into a pension but stopped last year when the pandemic impacted their earnings. One in ten people with a pension had stopped paying into it or had reduced the amount they pay during 2020[4].

Stopping contributions will have a detrimental impact on retirement income in years to come if you don’t restart contributions for a long time. So it’s important to resume as soon as possible.

For those yet to set up a private pension scheme, getting started can be the hardest part. Yet with the help of an adviser to do the legwork on your behalf, you can get saving in a pension with the knowledge you are using your earnings in a seriously tax efficient manner.

Source:

[1] https://www.ii.co.uk/analysis-commentary/self-employed-missing-out-ps4-billion-pension-contributions-ii515636

[2] Based on pension participation rates among the self-employed rose to 18% equating to 3.5m people (https://www.gov.uk/government/statistics/family-resources-survey-financial-year-2019-to-2020)

[3] https://www.ii.co.uk/analysis-commentary/self-employed-missing-out-ps4-billion-pension-contributions-ii515636 

[4] https://adviser.scottishwidows.co.uk/assets/literature/docs/sw-covid-19-release.pdf