Those aged 23 and 38 who are self-employed could be in for a rocky retirement, if recent figures from Fidelity are to be believed.
Two in three self-employed workers in that age bracket surveyed by the investment firm and pension provider said they had no pension savings whatsoever, with nearly three-quarters of those saying they can’t afford to put money away until they’re 55.
The findings, though stark, do stand up to scrutiny.
Two thirds of millennials aren’t on track to save as much as they needed to in retirement
A separate survey of 2,000 25-40-year-olds carried out in February this year by Moneybox, the app that allows users to round up and invest spare change, returned very similar results.
It said 44 per cent, more than two in five millennials, had less than £5,000 in their pension pots. More worryingly, two thirds felt they weren’t on track to save as much as they needed to in retirement.
You might be reading this thinking ‘yes, that’s me, I agree, I’m not and I can’t’.
This is Money has recently begun a campaign on behalf of Britain’s five million self-employed workers to try and level the playing field when it comes to saving for retirement.
However, for the moment, rather than simply parroting prophecies of doom, what practical and incremental steps could self-employed millennials take to try and put themselves in a better financial position ahead of retirement?
Romi Savova, the founder of online pension provider PensionBee, says when thinking about pensions you should start at the end – that is, how much income you need each year when you are retired.
If you haven’t thought about this, This is Money offers a free pensions calculator in partnership with Fidelity. From that point on, you can work backwards towards a more tangible goal.
Romi says from that moment on, the real struggle is ‘getting people aware and engaged’ and getting them into ‘good habits’ when it comes to saving for retirement.
‘The more light we can shine on solutions the better,’ she says.
This is understandable. Locking money away until you’re 55 can be a tough ask for anyone, but even more so for those who don’t have a stable income each month and need to retain access to savings.
What’s more, self-employed pension savers also lack some of the benefits afforded to employees.
While the self-employed benefit from Government tax relief in the same way as employees – meaning every £1 you put into a pension is effectively topped up by 20p for basic rate taxpayers and 40p for higher rate taxpayers – they don’t benefit from employer contributions.
Employers have to pay a minimum of three per cent to match the pension contribution of their employee, but many pay more and match contributions up to a certain level – for example of five per cent.
This is a tangible difference. If an employee earning £35,000 paid five per cent of their salary into their pension, and also saw an employer contribution of another five per cent, that would add up to £3,500 a year in contributions.
You would add basic pension tax relief to that, worth another £437.50. That would total £3,937.50.
By contrast, someone self-employed would only contribute £2,187.50 a year due to the lack of an employer contribution – 45 per cent less.
Save what you can, when you can
Once you know how much you would like to save for retirement, then the next question is how you get there.
Because you are self-employed, you are unlikely to have a regular monthly income in the same way as an employee, making it slightly harder to pay in a regular amount in your pension each month.
Romi instead recommends setting an annual goal and attempting to budget towards that. That, she says, can take the stress out of needing to contribute regularly to your pension and allows you to set more of your own rules.
For this, she says one of the key things to look for in your pension provider is whether they help you to do just that and don’t require you to make regular minimum payments.
This should be the case whether you have chosen an ordinary private pension or a self-invested personal pension – where you pick your own pension investments like you would in any other investment platform.
You can contribute up to £40,000 to your pension in the 2019-20 tax year, but apart from that you could be free to pay in as much as you like whenever you like, giving yourself the sort of flexibility that you likely crave as someone self-employed.
How to fix the self-employed savings crisis
This is Money is campaigning to level the playing field for the self-employed saving for their retirements.
1. Government should consult on including a prompt to contribute to a self-invested personal pension for all individuals filling out a self-assessment tax return within the tax return.
2. NEST, the Government-backed pension scheme, is currently trialling ‘side-car saving’. This allows savers to contribute to their pension and benefit from tax relief, but if they need early access to some of their savings, they are given this without penalty. This should be extended to Sipps, to allow the self-employed more flexible saving behaviour.
3. Government should match contributions made by self-employed individuals to their pension to account for the contributions they ‘lose’ by not being employed and eligible for auto-enrolment.
As an example, she says if you know as a self-employed person you get three larger invoices a year of over £4,000, then you can contribute a larger portion of those larger invoices, rather than having to squirrel away £70 every month or so.
Should you save into a pension or Isa?
Romi recommends saving into a pension, explaining that they have special benefits including tax relief that you don’t get with other vehicles, Gary Smith, financial planner at Tilney, says it’s important to remember pensions are ‘just one vehicle’.
He says because you are restricted from accessing your pension until you are 55, if you are self-employed, have less guaranteed income and need to access the money as a result: ‘If you can’t access it it’s no good to you.’
While Romi suggests working backwards and says putting money where you can’t access it is important as it is very tempting to try and touch it, Gary puts the focus more on the present.
He says that in the short-term millennials should focus more on building up an emergency fund in case their circumstances change in order to retain access to cash.
It matters what you’re saving for
You need to be aware of goals like buying a house, paying off student loans, or getting married. Such conflicts require you to weigh up the balance of whether, for example, you should pay off your student loan first or use excess cash to build up your retirement fund.
These tasks and milestones therefore require different tools. If you’re focused on saving for a house, then you’d likely consider putting excess capital into a Lifetime Isa – which offers a Government top-up of up to £1,000 a year toward your first home.
If you’re trying to build up savings or an emergency fund, then something you wouldn’t be able to access until your 55th birthday wouldn’t be much use. In such a situation, you’d probably be looking at trying to find a top rate easy access cash Isa, which allows you to retain access to money at short notice and save free of tax.
Gary says ultimately, ‘it just depends on what circumstances you’re in’.
Both Romi and Gary are in agreement on one thing though, which is that you should get in the habit of putting money away.
Gary says ‘getting in the mindset’ of saving and feeling more comfortable with it is the most important thing, which is why putting money into an Isa can get you on the right path, even if it isn’t a pension specifically.
This is, he says, mainly because your ability to save tends to accelerate as you get older – in other words, the further up the career ladder you go, the more disposable income you should have to save.
And perhaps the statistics do bear that idea out: that the most important – and hardest – thing to do is get started.
Data from PensionBee says that 70 per cent of its self-employed millennial customer base have set up contributions.
While that demographic does make up only 34 per cent of its customer base and the data doesn’t show how much they’re saving, it does suggest those who are able to access savings products and have done so, do pay into them.
And the sooner you do so, the better. As Emma-Lou Montgomery from Fidelity says: ‘The beauty of youth – never more so than when it comes to saving and investing – is that time is firmly on your side.’
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