With an uncertain income and no employer pension contributions, self-employment can make it hard to plan for retirement. But the flexibility it offers has advantages, too.
When it comes to long-term finances and retirement planning, the self-employed have little option but to engage or risk being left behind. While there are many challenges, the flexibility that comes with going it alone offers some benefits, too – and this might be particularly important in light of the impact of the COVID-19 crisis on their businesses.
Seven in 10 suffered a fall in business revenues in the six months from March 2020, with 9% ceasing trading entirely, according to research by the Financial Conduct Authority1.
That will inevitably affect retirement plans, an area in which the self-employed are in some ways disadvantaged. They are among the groups least likely to have a pension they are contributing to, the Financial Conduct Authority reported, with just 55% building a pension pot, compared with 80% of all adults in work2.
An uphill battle
There are several reasons for this. Most people open a pension with their employer, but the self-employed are excluded from automatic enrolment, which, since its launch in 2012, has seen millions of workers placed into workplace pension schemes to help them make payments and plan for retirement.
So, while self-employment has grown significantly in recent decades – rising from 8% of UK workers in 1975 to more than 14% by 20193 – the pension challenges that come with it remain largely unchanged.
They include the unpredictability of income that is often a feature of self-employment, notes Tony Clark, Senior Propositions Manager at St. James’s Place. “An erratic income stream, with good periods and not-so-good periods, is an issue,” he says. “It’s harder to plan ahead and know how much you can pay into your pension.”
There’s also the time and hassle factor, with self-employed people having to manage both their personal and business finances at the same time. Setting up and maintaining a pension and long-term savings plans can be time-consuming, especially when first leaving employment and embarking on the solo journey.
With no workplace pension available, the onus is on the self-employed to be proactive when it comes to making sure they are putting enough aside for later life. “The employed are being nudged into saving more, whereas that doesn’t happen for the self-employed, so it’s about being savvy and active in how you plan,” says Clark.
Making it work
The odds might feel stacked against you if you’re self-employed. But in many ways, the flexible nature of self-employment fits well with the modern way of retirement.
“Most people approaching retirement in the next 10 or 20 years will need to draw on a range of different assets, not just their pension,” says Clark. “The self-employed have the opportunity to be a bit ahead of the curve in that respect.”
For instance, while pensions are important, they should ideally be just one part of a broader retirement savings package. Individual savings accounts (ISAs), personal pensions, self-invested personal pensions (SIPPs), property and business assets can all provide an income in retirement, as well as offering extra diversification and investment flexibility.
“It’s about building retirement assets, and your pension is just one of them,” says Clark. “Having a plan in place can help you take full advantage of the flexibility that often comes with being self-employed.”
That plan may involve making pension or investment contributions that fit with earnings levels that often jump up and down. For instance, some might find it easier to pay in lump sums every few months rather than contributing a set monthly amount.
Uneven or irregular incomes can also work in your favour due to the way pension allowances work. Under the annual allowance rules, there’s a limit to the amount you can pay into a pension each year, but there’s also a ‘carry-forward’ feature.
This means you can use any unused allowances from your previous three tax years to maximise your pension contributions in the current tax year. It also means that if you don’t use all of your allowance this year, you can carry it forward and still benefit from it in future.
“You can balance out how much you contribute to your pension, depending on if your business is experiencing good years or tough times, and really take advantage of those tax allowances,” says Clark.
Working as a team
Maximising allowances and making the flexibility of self-employment really work well for you might come down to letting a professional take some of the burden off your busy shoulders.
“If you haven’t used all of your allowance, an adviser can look at the past few years and see what you can do with it,” he explains. “It’s like a jigsaw puzzle, whereas when you’re employed, it’s easier to just let your pension do the work.”
Having an adviser is more crucial than ever in understanding how you can make contributions that fit with your work and earnings patterns. “Retirement and pension planning will often fall down the list when you’ve got a lot to do, so it’s important to ensure you’re not in it alone,” says Clark.
“Use a financial adviser, because trying to do everything yourself can be really hard when you’re self-employed.”
If you’re self-employed and need help planning your retirement, get in touch today.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1,2 Financial Lives 2020 survey: the impact of coronavirus, Financial Conduct Authority, 11 February 2021, 16,000+ survey respondents
3 What does the rise of self-employment tell us about the UK labour market?, briefing note, Institute for Fiscal Studies, 19 November 2020