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LISA reform could boost the pensions of 1.2m self-employed workers

Rebecca Goodman
Written By:
Rebecca Goodman
Posted:
Updated:
14/11/2023

If the upper age limit on the lifetime ISA (LISA) was increased to 55, this could provide a much-needed boost to the pension pots of self-employed workers, an investment firm has suggested.

Just under a quarter, 23%, of self-employed workers are set to have a moderate retirement income, which is defined as £23,300 per year or £34,000 per year for a couple.

For those aged between 18 and 39, the rate is 14.9% and for those aged 40 to 55, it’s 21.9%. Yet this rises to 46% of all households where adults are employed.

There are 1.2m self-employed workers in the UK but they are not eligible for auto-enrolment of pensions, as this is only for employed workers, and this means they miss out on employer contributions.

That leaves a gap for self-employed workers, and one area they could look to use is the LISA, which offers a 25% Government bonus every year. If a saver puts away the full allowance, of £4,000, they will receive a further £1,000.

A pension, requiring a regular contribution isn’t always the preferred option for the self employed as they often don’t have a regular salary. Yet 62% of self-employed households have adequate liquid assets set aside.

Hargreaves Lansdown, the group that carried out the research, said as the LISA bonus works in a similar way to basic rate tax relief on pension contributions, it could be used as an alternative way of saving for retirement.

If you have a LISA, the money within it can only be used towards a first home or a retirement pot, yet they are only available to people aged under 40. This excludes a lot of self-employed people who tend to be older than those who are employed. In 2018, for example, when the LISA was introduced 3.3m self-employed workers—70% of this group—were unable to open an account because of their age.

There is also a 25% penalty if money is taken out for another reason other than retirement or a first home. Yet self-employed workers often don’t want to lock their money away for this long.

The firm is calling on the Government to open up LISAs, and the Government bonus, to people up to the age of 55. It also wants to see the penalty reduced to 20% for self-employed workers.

It said this could benefit an extra 680,000 households with a self-employed worker who pays the basic rate of tax. The reduction of the withdrawal penalty could benefit 540,000 households aged under 40 with a self-employed worker paying the basic rate of tax.

There have been previous calls to reform the LISA in light of the facts that the number of withdrawal penalties charged to those accessing their LISA savings early rose 17% in 2022.

For higher-rate taxpayers, the firm said the 40% tax relief on pension contributions makes them a better idea yet for those paying basic-rate tax, LISAs could make a big difference.

‘Reform the LISA regime to boost retirement prospects’

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “We are calling on the Government to reform the LISA regime to boost the retirement prospects of the self-employed.

“We want to see people able to open LISAs and receive bonuses on contributions until the age of 55. We would also like to see the penalty on early withdrawals reduced to 20% for self-employed people. This would enable them to save for the longer term knowing they don’t forfeit their own savings should they need to access the money.

“Times have been tough financially, but self-employed people have built up cash savings. Some 62% of self-employed households have adequate liquid assets set aside. We advocate keeping three to six months of essential expenses in an easy access savings account but over and above this there is headroom for self-employed people to boost their long-term resilience through a LISA if the rules will permit it.”

Andrew Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), said: “The self-employed have cause to maintain a greater level of financial liquidity to help them manage cycles in demand for their services, and to guard against threats such as late payment, non-payment, and unplanned expenditure.

“With this in mind the self-employed can be more reluctant to put money out of reach until they retire – especially not without the added incentive of additional contributions by an employer and from the perspective of lower rate taxpayers comparatively greater tax relief. But this only delays financial detriment until later life.”

Related: Lifetime ISA rates soar: An essential guide to the first-time buyer and pension saving scheme