Recent reforms to the state pension system could give millions of self-employed people more money from the Government to help them through retirement.
As of 6 April this year, people who work for themselves will be able to qualify for the full flat-rate weekly payment of £155.65, provided they have made sufficient National Insurance contributions.
Under the old system, the amount self-employed people could receive was limited because they were unable to get the top-up “state second pension” payments that were made to many employees.
This is welcome news which could see millions of self-employed people better off in their retirement, but the news is not so good when it comes to private pensions.
A record number of people in the UK are becoming self-employed or starting their own business. According to the Office for National Statistics, the number has increased by 182,000 to just under 4.7 million.
However, there are growing concerns that this new generation of entrepreneurs are not saving enough for their retirement. A new report by the Federation of Small Businesses shows that less than a third (31%) of self-employed people are saving into a private pension.
The number of people who pay into pensions and the typical contribution rate have both dropped sharply in the wake of the financial crisis and recession.
Someone starting to save £320 a month at age 45 would end up with a pension fund worth around £92,000 when they retire at 67. This would give an income of around £4,000. Added to the £6,000 from the state pension would only generate an annual pension of £10,000, which is unlikely to be enough for a good standard of living for most people.
Research from the government-backed Money Advice Service suggests that people need pensions worth somewhere between 50% and 80% of their pre-retirement salaries. As it currently stands, self-employed people are unlikely to get anywhere near this target level of retirement income.
Many experts believe that the Government should introduce some form of automatic pension saving for the self-employed. Auto enrolment is currently being rolled out for employees, so the vast majority of people will join their company’s pension scheme and benefit from regular contributions from their employer too. However, this will have no impact on self-employed workers in its present form.
Although self-employed people won’t benefit from the employer contributions, there is still a big tax incentive to save into a pension.
Any payments you make will automatically be given tax relief at the basic rate (20%), which means that every £80 you pay into your pension is topped up to £100. For higher-rate taxpayers, a further £20 can be claimed back through the self-assessment system – this means £100 of pension only costs £60.