Self-employed facing £4bn pension ‘crisis’

Self-employed facing £4bn pension ‘crisis’

The self-employed could face a retirement ‘crisis’, as they miss out on £4 billion in pension contributions

Millions of self-employed people could run into severe financial difficulty when they retire given 4 in 5 are not saving into pensions at all, according to a recent study.

Research by interactive investor has found that of the 4.3 million self-employed people in the UK, 3.5 million are not making any pension contributions whatsoever. And because they work for themselves, they also miss out on employers’ contributions.

In fact, it’s estimated that the self-employed are missing out on £4 billion in employer contributions a year.

Self-employed forgo £1 billion in pension tax relief

The figure is based on what those working for themselves would receive if they were an employee and were to receive the minimum auto-enrolment of three per cent of gross salary. However, the study points out that in reality, many employers contribute more than this.

Moreover, the tax relief that the 3.5 million would get if they had their own pension pot is estimated to be around £1 billion.

Interactive investor states that the figures highlight the disparity in pension provision between the self-employed and employees.

A typical employee on an average salary of £31,461 a year, would make an eight per cent pension contribution of £2,516. This would be made up of an employee contribution (5%) of £1,573, which also includes a one per cent tax relief of £314, and employer contribution (3%) of £942.

COVID-19 has forced many self-employed to use savings

A self-employed person earning the same amount and making the same pensions contributions would have to pay an additional £942 to be on the same level.

According to the study, there are a number of reasons why self-employed people do not pay into a pension. This includes not earning enough to afford it or believing it isn’t worth it without the employer contributions. 

In addition, over the last year, with millions of self-employed falling through the gaps in pandemic support, many have had to dip into their savings to survive.

Others, meanwhile, plan to sell their business or have other means of funding their retirement. 

Becky O’Connor, Head of Pensions and Savings at interactive investor, described the gap in pensions between the employees and the self-employed as “staggering”.

Government must address disparity in pensions 

She said: “Self-employed workers are at a disadvantage when it comes to building up adequate retirement savings because they tend to earn less, but also because they don’t have an employer to set up a pension for them or pay in employer contributions. 

“This is something the government needs to address as ultimately, the self-employed are more likely to depend on the state if and when they do stop work, if they haven’t set aside their own pension provision.

“But self-employed people can take action for themselves. It is important they are not tempted to cut the pension corner when they choose to go it alone – or else they may struggle for income when they get older.”

Many personal pensions only require a small contribution to get started. For example, if an individual put in £80 a month, with the tax relief at the basic rate of 20 per cent, which is automatically added, that contribution becomes £100 a month.

O’Connor added: “It’s safer to assume you will want to give up work at some point, rather than planning on working until you drop.”


  • Boff says:

    I’m a semi-retired contractor. My wife and I have decent pension pots in SIPPs.
    These came from our companies’ contributions only, by putting any money into SIPPs which would have incurred higher rate tax if we had paid it out as salary.
    As far as I know there is no limit to company contributions.
    Check it out with your accountants.

    • Andrew Harrison says:

      Boff – well done, one of the advantages of having your own company.
      There are limits on Pension Contributions, the Annual Allowance is currently £40,000 but read the small print for other limits.
      Self employed versus own limited company: contributions from the company don’t count for National Insurance – disadvantage to the self employed.
      Contractor inside IR35: I am not sure but since you are paid after tax and NI, I guess that you can only get the tax back on contributions.

  • Andrew Harrison says:

    From the article:
    “Government must address disparity in pensions”

    The main reason for the disparity is the fact that most people don’t plan for retirement by paying into a pension scheme. So is the article demanding more government interference in how the self employed manage their finances?

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