Under a quarter of self-employed on track for moderate retirement

05 February 2024

Written by Retirement Line Updated: 5th February 2024

Only about 23% of self-employed households are on track to have a moderate income in retirement, according to new research. In contrast, almost half of households where the main earner works for a company can expect to enjoy a moderate retirement.

For those on track for a comfortable retirement income, only 7% of the self-employed are on track, compared to 16% of company employees.

So why are the self-employed falling behind on their pension savings? One key issue is that self-employed individuals are not subject to auto-enrolment like company employees are. 

They may also struggle to save for retirement because of their irregular income and the restriction on accessing their pension fund until they're at least 55 years old.

Speaking about the findings from Hargreaves Lansdown, Helen Morrissey, the company’s head of retirement analysis, said: 

“Government data has shown the self-employed are more likely to use assets such as property. But given the outlook for falling house prices and high mortgage costs, many self-employed people may be a bit more reluctant these days to sink their money into bricks and mortar.”

How can the self-employed maximise their retirement income?

According to the government website MoneyHelper, there are around 4.5 million self-employed people in the UK, yet just 31% of them are saving into a pension.

If you are self-employed then you have several different ways to save or invest for your retirement. Taking the time to research and decide the best saving options for your current and future needs may help to motivate you to start putting away more.

Options include personal pensions, a cash savings account, an ISA or a Lifetime ISA. Below, we’ll explain some of the differences between these products to help you compare them.

Please note that this article does not provide advice on what product will suit your financial goals. Please seek professional advice or guidance before making a decision.

Personal pensions

Personal or private pensions are chosen by many self-employed people who have no access to a workplace pension, and work in a similar way. However, you’ll be the only one making contributions into it.

There are three main types of personal pension:

• Ordinary personal pensions: most large providers will offer these.

• Stakeholder pensions: simple products with the benefit of a cap on charges.

• Self-invested personal pensions (SIPP): for a wider range of investment options.

An important benefit of saving into a private pension scheme is that tax relief can see your fund grow much more quickly. If you’re a basic rate taxpayer you’ll automatically get 20% tax relief, so every £100 that you pay into your fund becomes £125. 

If you pay the higher rate of 40% in England, Wales or Northern Ireland then you can claim back an additional £25 for every £100 that you pay in, through your tax return each year.

Your money will be invested by your scheme, giving your fund the chance to grow further over time. However, as with any investment there is a risk that the value of your fund can go down as well as up.

If you do choose to save into a pension scheme then you’ll be able to access your fund from the age of 55 (changing to 57 from 2028), unless you have special circumstances such as being very unwell. If you might wish to access your fund before 55, then you may wish to consider another option.

Nest pension

If you are self-employed or the sole director of a company that doesn’t employ anyone else then you could consider a pension from National Employment Savings Trust (Nest). 

This type of pension scheme was created by the government and run as a trust by the Nest Corporation, with no shareholders or owners. It is simply run for the benefit of its members.

You can contribute as regularly as you wish to your Nest fund, as long as you pay at least £10 each time. Any contributions you make will benefit from basic rate tax relief and will stay in your pot until your chosen retirement date.

Cash savings account

You may already have a cash savings account for your emergency fund, which is ideally around six months of your outgoings. But you can put money away for your retirement using this option, too.

A cash savings account might be the preferred choice for self-employed earners who are close to retiring, or have already retired or semi-retired.

You’ll have flexibility, as you can pay in and take out as much as you want, when you want. This could be beneficial if you decide to retire early or have an emergency that you require funds for. But be cautious about dipping into your fund too much or too early, as you’ll need to ensure you have enough money for your retirement.

Though your money won’t be invested to enable it to grow in size, interest will usually apply to your savings. You should consider, however, that you may have to pay tax on the interest that accrues on your savings if you exceed your annual allowance. 

Also remember that you won’t benefit from the tax relief that pension scheme savers enjoy. In addition, the value of your cash savings could be eroded by inflation if it rises faster than your account’s interest rate. 

Individual Savings Account (ISA)

If you prefer not to save into a personal pension scheme, or want to put some of your cash in a place where it can be accessed earlier if needed, you could use an Individual Savings Account (ISA). These are available as both Cash ISAs and Stocks & Shares ISAs. 

Like a cash savings account, interest applies to your cash ISA to help your money grow over time. However, if inflation is higher than your interest payments then your savings will lose value.

With a stocks and shares ISA, your money is invested on your behalf by your provider. This gives your money a chance to grow, hopefully outstrip inflation and give you a good return. However, these ISAs are higher risk as your investments could also perform poorly, so you may wish to speak to a financial adviser before making a decision.

Whilst you won’t benefit from tax relief when paying into your ISA, you won’t pay tax on the interest or returns that your money earns, irrespective of how much your savings grow by. 

Unlike a pension scheme, all the money that you eventually withdraw from your ISA will be completely tax-free, not just the first 25%. You can put up to £20,000 into your collective ISAs each tax year.

As with a cash savings account you can access your money at any age. So, if you decide to retire early then your ISA fund could bridge the gap until you are old enough to access your pension savings. 

Lifetime ISAs (LISAs)

Lifetime ISAs (LISAs) are also available as both Cash ISAs and Stocks & Shares ISAs. If you are self-employed then this could be an option for you if you are: 

• Under the age of 40

• Not intending to start accessing your retirement savings until you’re 60+

Again, you won’t benefit from tax relief on your savings. However, the big draw with this product is the 25% government bonus you receive on top of any cash you pay in. 

With a £4,000 a year contribution limit, it means you can benefit from up to £1,000 of top ups to your pension savings each year.

There are some drawbacks to consider though. Firstly, there are hefty charges if you access your money before the age of 60, unless you are doing so to buy your first home. Secondly, they can only be opened by people between the age of 18 – 39. Lastly, you can only contribute into them until you reach 50. 

Helen Morrissey of Hargreaves Lansdown spoke recently about LISAs and their role in encouraging more self-employed people to save for retirement. She proposes an extension to the age range to make LISAs more accessible:

“Given that many people become self-employed later in their career, extending this to age 55 could do more to help this group boost their retirement prospects,” she said.