Auto-enrolmentJun 6 2019

How to save into a pension if you are self-employed

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How to save into a pension if you are self-employed

This particularly holds as the self-employed are not automatically “auto-enrolled” into any particular pension. 

In contrast, auto-enrolment makes it compulsory for employers to offer eligible workers a workplace pension, and it is up to the individual to opt out. 

Victoria Rutland, chartered financial planner at EQ Investors, says: “Self-employed workers tend to be under provided for in terms of pension savings. With the self-employed market growing, so is the gap in pension provision.”

Research from Prudential found 36 per cent of self-employed people struggle to save for their pension and 43 per cent do not have one, compared with 4 per cent of those in employment.

So 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? 

Sipps 

Stephen McPhillips, technical sales director at Dentons Pension Management, believes that Sipps 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,” he says. 

He adds: "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, of course the overall Lifetime Allowance (LTA)."

Hannah Owen, financial planner and mortgage adviser at Quilter Private Client Advisers, says: “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.”

She adds: “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?”

Mr McPhillips highlights that 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. 

Mr McPhillips adds: “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 Sipps 

Experts highlight that it is important for self-employed people in particular to try to obtain the maximum state pension allowance. 

Ms Owen says: “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. 

Ms Owen adds: “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.”

Ms Rutland believes 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,” she adds. 

Other than Sipps, clients can open basic personal pensions and make regular or one-off contributions. 

Steve Webb, director of public policy at Royal London says: “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?

Steve Webb, director of public policy at Royal London, confirms: “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."

He adds:  “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 ‘nudge’ them into pension saving.”

But Andy Chamberlain, deputy director of policy at The Association of Independent Professionals and the Self-Employed, thinks auto-enrolment is not the best solution for plugging the pension deficit for the self-employed. 

“Auto-enrolment doesn’t and shouldn’t apply to the self-employed who want to remain independent of employment.”

Instead, Mr Chamberlain calls for more innovative products that work for people who are their “own boss".

IPSE suggested last year 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.

Mr Chamberlain adds: “This is something that the financial industry and government are still struggling to understand, although we have seen some progress in recent months.”

saloni.sardana@ft.com