Saving and Self-Employment: time for a change
IPSE is calling for government to create a flexible pension scheme for the self-employed, and for improving the advice financial advisers’ can offer to the self-employed on their future. The self-employment review and its findings will be a major focus at IPSE’s Policy Conference this spring.
Saving for your future when you’re self-employed isn’t always easy.
The nature of self-employed work means you can’t always be on assignment and be able to set aside a regular amount for your future.
You don’t have an employer contributing to your pension, so saving isn’t as straightforward. Variable incomes mean few can commit to setting aside a fixed amount each month, and even fewer are prepared to lock away money for several decades that may be needed at short notice.
Even if you are able to put aside some cash, there is often little flexibility around withdrawing or paying in to a pension. This creates particular problems for independent professionals.
This concern was highlighted last year in a national survey from IPSE, which showed over half (54.4%) of freelancers are concerned about their finances past retirement age. Not only that, our results revealed well over a third (37.3%) are unable to contribute towards a pension fund.
Make no mistake, those working for themselves have tough decisions to make about their pensions and future financial situation.
Several of the pension products on the market are not cheap and accessible for the self-employed. These products may not take income variability into account, with some having prohibitively high fees. Countless self-employed workers have to choose alternative ways to save, including through ISAs, property, or investments in stocks and shares, due to the flexibility these offerings provide.
Although these can often be very good value, they may not always be the most appropriate methods for the long-term savings required for a retirement income, as they can frequently offer poorer returns and fewer tax advantages. Additionally, such options are usually only attractive to workers earning large amounts at any one time.
This sadly means many self-employed workers who do not have high incomes are restricted in the number of attractive options available to them. And many self-employed express a desire to continue working beyond retirement age - or may already be beyond retirement age - so a pension is not an option. Because of this the self-employed risk financial insecurity when facing retirement, a major issue given record high rates of self-employment.
For our part, IPSE introduced a flexible pension scheme for our members, but there needs to be a solution available to all self-employed.
The Government’s review of self-employment is looking into the issues surrounding how people who work for themselves save for their retirement. The current system administered by the Government’s default auto-enrolment provider, NEST, has no auto-enrolment for the self-employed, although it obviously does for employees.
Our proposed solution is simple. That is for NEST to introduce a flexible pension scheme available to the self-employed allowing them to withdraw the last two years of contributions without significant penalty. This would help encourage more to save for retirement and reduce the perceived risks of self-employment to new entrants.
Yet more can still be done. Around 9 per cent of freelancers recently surveyed by IPSE said that they did not know which products would best suit their needs. They need better advice. So there should be free, tailored impartial advice - which is not sales orientated - for self-employed savers from the Government-backed Money Advice Service.
With the economy moving in the right direction after a difficult few years, it is important that reforms are undertaken sooner rather than later, so that the self-employed feel financially safe if they are to continue to lead the way towards a strong and flexible economy.