How to help the self-employed save more

Tom Conner, director at Drewberry, confesses he is "extremely worried about self-employed people and saving for retirement".

According to Drewberry's 2017 Wealth and Protection survey, there is a massive savings gap. The study found: 

• 75 per cent of self-employed people haven't started saving for their future.
• Two in five people had no more than £1,000 in cash savings to fall back on.
• One in five have no pension, while a further fifth have a pension worth £10,000 or less.
• More than 1 in 10 people described their finances as ‘hanging by a thread’.

The figures are borne out by research from Scottish Widows earlier this month, which revealed nine out of 10 Britons are in danger of financial hardship should serious illness strike.

Although 43 per cent of the 5,022 people surveyed by Opinium Research on behalf of Scottish Widows said they would rely on their savings if they or a partner became unable to work, the stark reality is 35 per cent admitted their savings would barely stretch three months.

Moreover, 30 per cent of those surveyed said they were not saving anything at all - which if extrapolated to the wider UK population, means 15.5m people could be at risk of financial hardship.

For Adam Higgs, head of research and adviser services at F&TRC, the biggest challenge in getting self-employed people to save more is their income stream.

He explains: "For many self-employed people their income is not stable and changes month by month, week by week. As such the traditional method of saving a set amount each month does not always work."

Lack of income or lack of willpower?

However, Martin Stewart, director of London Money, does not think it is simply about a lack of regular income.

He thinks we live too much in an 'instant gratification' age that affects everyone, self-employed or not.

Mr Stewart says: "I don’t think this is necessarily a problem that afflicts just the self-employed, more we are living in an age that is debt fuelled and most people have forgotten how to save or simply can't save."

It’s vitally important that they do save, yet, of course, we are totally sympathetic to the causes of why they don’t. Jamie Smith-Thompson

While Mr Stewart concedes that, for some entrepreneurs, there could be a problem with regular cash flow, he also thinks there's just not enough self-motivation to help people overcome cash flow concerns.

He explains: "There will be some aspects of self employment (and in particular those who run limited companies) where cash-flow can be an ever present concern although again, I see many employed people on six-figure salaries who are never more than four weeks away from financial Armageddon."

But for Jamie Smith-Thompson, managing director of Portafina, a firm which specialises in helping the self-employed, it is less laziness and more the simple and yet difficult task of keeping on top of everything - especially chasing up invoices that have remained unpaid. 

He comments: "Self-employed people are basically businesses on their own and with any business, there are always going to be cash-flow issues.

"They will experience people paying them late or not paying them at all and there will be periods where they may not be able to work through sickness or injury or even times where they can’t get work because of the markets dropping.

"It’s vitally important that they do save, yet, of course, we are totally sympathetic to the causes of why they don’t."

Regulatory restrictions

Mr Conner believes some of the latest policy decisions have hindered, rather than helped the self-employed professional to save. 

He explains: "Recent legislation changes haven't helped the self-employed at all. They've been left out of auto-enrolment and, post the Retail Distribution Review, they have to pay upfront fees to an adviser to set-up a pension for them.

"If someone can only afford to put away say, £100 per month, then it's highly unlikely they'd be willing to pay £500 upfront for advice.

"Without an adviser 'selling' the benefits of saving and arranging the policy for them, many self-employed people will never get started, or get started way too late."

Indeed, the 2017 Drewberry research also showed even ready savings in cash were lacking among two-fifths of the population (see Figure 1: Cash savings levels).

Figure 1: Cash savings levels in the UK

According to Mr Conner, the current post-RDR charging method needs to be revisited for new accumulation products - otherwise, as he states, it "just puts lower income people off getting advice and reduces their likelihood of saving".

Lack of information

Steve Andrews, head of managed services at Focus Solutions, believes one of the challenges is the lack of clear and easily accessible information about savings products that speak to the specific needs and considerations of the self-employed. 

He says: "The self-employed have a variety of different needs and considerations to the employed, which often need more ongoing attention due to changing circumstances.

"They have no sick pay, no forced pension provision (employer pension scheme) and they could have periods of fluctuating levels of turnover, unlike the employed where the income is a constant.

"Unfortunately they still have the same bills as the employed. They are likely to have a mortgage, run their business, pay their taxes and live their life."

Technology can help

The rise of apps, cashflow modelling, financial 'chatbots' and online investment planning calculators, as well as the rise of open banking can make a huge difference to individuals seeking to monitor income and expenditure daily, and help consumers take better control of their day-to-day finances.

This is the view of F&TRC's Mr Higgs, who says: "There are a number of propositions currently available in the market such as Plum, Cleo and OvalMoney that are able to monitor a client’s income and expenditure through banking aggregation in order to identify times when they can save money affordably."

Mr Higgs adds: "Investment providers that can work with or deploy their own software on this basis and accept smaller ad-hoc contributions on a more regular basis are ideally placed to support such clients save in a way that better meets their needs."

Building on this, Mr Andrews believes technology could and should be used more widely by providers and advisers to help the self-employed build up a fair and accurate picture of their own financial situation, and from there to guide and inform them about what savings and financial products they might need.

I would squirrel money away at every opportunity in anticipation of there being some unforeseen event that might mean my income could dry up. Martin Stewart

He comments: "Interactive cashflow tools can provide a powerful and visual way of presenting an individual’s complete financial position, to identifying savings shortfalls and potential protection needs.

"These type of tools should allow a range of options to be built, demonstrating the effects of certain 'what if' scenarios could have on the individual due to loss of business income, or through long-term illness or injury. 

"This type of detailed planning can allow individuals to make some key decisions in conjunction with their adviser, and enable them to monitor on a more regular ongoing basis, online in client portals, or through co-browsing sessions."

He welcomes the move towards Open Banking (PSD2), which he believes will enrich interactive cash flow planning tools with real-time data feeds to ensure they are accurate and up to date.

And, as these tools become more client-facing, across all devices and tablets, the entrepreneur who is always on the move will be able to get monitoring and alerts to help them manage their ever-changing circumstances.

According to Mr Andrews: "The rise of artificial intelligence (AI) will also become more widely used to support individuals with their savings and retirement goals, monitoring the individual’s financial situation in real-time (using Open banking), making suggestions against their goals, increase tax-efficient savings, reduce outgoings, providing education and market commentary. The options are endless."

Good habits

But while the world waits for the sort of technological advances that open banking will bring, there are things individuals can do to help get themselves saving more, and more frequently.

One of those is just to start putting a little away on a regular basis, and making this a habit.

According to Mr Stewart: "For me, personally, being self employed from the age of 21 actually made me a better saver. I would squirrel money away at every opportunity in anticipation of there being some unforeseen event that might mean my income could dry up.

"This habit still stays with me today and it is a good one to get into for anyone working for themselves. You don’t want to be the owner of a business that failed, so put it on the strongest possible financial footing you can as soon as you can."

simoney.kyriakou@ft.com