Saving for a UK pension for those who are self-employed can often be more challenging compared to people who are not self-employed.
This particularly holds as the self-employed are not automatically “auto-enrolled” into any particular UK pension.
In comparison, auto-enrolment makes it compulsory for employers to offer eligible workers a workplace pension, and it is up to the individual to opt out.
Self-employed workers tend to be under provided for in terms of UK pension savings. With the self-employed market growing, so is the gap in pension provision.
Recent research found 36% of self-employed people battle to save for their pension and 43%t do not have one, compared to just 4%t of those in employment.
Are self invested personal pensions the obvious way to save into pensions for the self-employed or what else can the self-employed due to boost their later life earnings?
Self-invested personal pensions (SIPP’s)
Sipp’s are not the only solution for the self-employed.
Some Sipp propositions would not be open to modest levels of savings in the early accumulation phase because of their charging structures and focus on different parts of the market.
The pensions landscape is a complex one and sound financial planning is key to ensuring that clients are fully aware of issues such as the Annual Allowance (AA), the Money Purchase Annual Allowance (MPAA), the Tapered Annual Allowance and, the overall Lifetime Allowance (LTA).
A Sipp differs from a personal pension in that Sipps usually offer a wider range of underlying investments and direct shares, and also commercial property can be held within a SIPP.
A self-employed person should pick their style of pension based on certain factors, such as are they competent enough/comfortable enough to choose their own investments? Do they need to hold commercial property? And is cost a factor?
While some low cost platform pensions might be called Sipps and may be structured as such, typically there will be a restriction on the types of investments which can be made within them.
Due to capital adequacy rules that came into effect in 2016, if Sipp providers want to offer non-standard investments, they must hold more money in their bank accounts.
A non-standard asset is one which cannot be correctly valued and realised within 30 days. Standard investments can be realised within 30 days and typically include products such as cash, bonds, exchange traded commodities and UK commercial property.
Recent information from the Financial Ombudsman Service makes it clear that Sipps need to be the right vehicle for clients only where their circumstances require and there is no doubt that some clients are in Sipps which are not a good fit for their requirements, risk profile, capacity for loss and so on.
So what are the alternatives to saving into Sipps?
Alternatives to Sipp’s
Experts highlight that it is important for self-employed people in particular to try to obtain the maximum state pension allowance.
An individual should complete a BR19 form, available on the gov.uk website, so they can see how much they might expect to get as a state pension.
An individual needs 35 qualifying years to get the full new state pension.
Self-employed people need to ensure they are getting tax relief on their pension contributions. If an individual is paying higher rate tax, they may need to fill out a self-assessment to claim back the higher rate tax they have paid.
Isas should also be considered as they are a tax-efficient way to save.
Each year, everyone has a £20,000 Isa allowance which cannot be carried forward. Isas can either be held in cash or invested through a number of options including funds and shares.
Other than Sipp’s, clients can open basic personal pensions and make regular or one-off contributions.
Younger self-employed people under the age of 40 may want to consider a Lifetime Isa as an alternative to a pension, especially if they are focused on saving for a house deposit.
Auto-enrolment for the self employed?
Could auto-enrolment help the self-employed save for their pensions?
Most self-employed people are excluded from automatic enrolment (unless they have a mixture of work as an employee and as self-employed) but there is no reason why a new form of automatic enrolment couldn’t work for the self-employed.
The best way to do this would be through the tax return process which would catch most higher income self-employed people and could be used to persuade them into pension saving.
An alternative could be that the government should develop a ‘sidecar’ pension. The sidecar is designed to give the freelancer access to funds that they might need if business dips but once it reaches a certain point funds will go into a pension.
This is something that the financial industry and government are still struggling to understand though.