The self–employed pension problem

At the end of 2018, the government announced a series of trials encouraging freelancers to save into a pension. With only 14% of self-employed people saving for a pension between 2016–2017 this campaign isn’t a bad idea, but will it work?

I didn’t start a pension until a couple of years ago because:

1. I didn’t feel I had the money to save
2. I found the options confusing

Money, money, money

Freelancers in the UK earn £16,000 on average. This figure accounts for both full and part-time self-employment.

HMRC figures suggest the mean annual self-employment income is somewhere around £16,000 but, as Michael O’Connor showed, when you remove the small number of £100,000 plus earners, the mean incomes of the rest are very low.

Flip Chart Fairy Tales: Tax and the self-employed

When I saw this figure, my first thought was that part-time self-employment and micro businesses might be reducing the average figure. Freelance Heroes recently ran a survey across their membership, and the most common earnings bracket was £0–£20,000.

Assuming that most members of that group are full-time rather than part-time, this would back up the government’s findings.

If freelancers are earning £16,000 on average, it makes sense that many don’t feel like they have the cash to set aside for a pension. 

Considering that many freelancers will be renters as opposed to homeowners, it would be no surprise if some prefer to save for a house deposit rather than a pension.

The government’s Lifetime ISA (LISA) is flexible enough to handle saving for both. However, there aren’t a huge number of providers which could be a barrier to entry.

Who, what and how much?

For freelancers who can save some of their earnings for a pension, the next step is to decide:

1. The type of pension
2. Which provider to choose
3. How much to save

Unless you work in finance or know someone who does, you need a financial advisor to give you some independent advice. This isn’t an option for cash-strapped freelancers, so this typically marks the beginning of an epic Google-fest trying to separate the SIPPs from SSASs and stakeholder pensions from master trust pensions.

I wouldn’t be surprised if most freelancers give up at this point and earmark a pension for another time.

Once you’ve decided which pension is right for you, the next step is choose who to save with. Aside from rates, this is a good time to consider whether the providers offer ethical pension options, if that’s important to you.

Once that’s over, you’ll need to work out how much you can put aside. MoneySavingExpert.com recommends the following:

Take the age you start your pension and halve it. Put this % of your pre-tax salary aside each year until you retire.

Or check out this FreeAgent blog on pension prep for freelancers that breaks down what you might need to account for and how to reach those goals.

My pension started with tiny contributions and these have increased over a couple of years. I save this money into the same account I use for tax. 

Is there a better system?

Raising pension awareness and incentives is a good place to start. But I’m not sure this will remove the barriers-to-entry for many freelancers.

A better pension system would be to create an opt-out government scheme that freelancers are auto-enrolled into. Contributions could be collected at the same time as a tax return, in the same way that National Insurance Contributions and Student Loans are repaid now.

Like anything government-run, this would be an imperfect solution. Not least because compound interest would be reduced due to annual contributions.

However, it would put the onus on individuals to opt-out and freelancers could easily adjust their tax savings to factor in a contribution towards a pension. An option to freely/cheaply move the pension to an independent provider would make it more attractive to those who want to set up a hassle-free pension, even if it’s not the best offer on the market.

I hope the government’s scheme increases pension adoption amongst the self-employed. Yet, I’m doubtful we’ll see a seismic shift until something radical is introduced.