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Self-employed risking their retirement through Covid pension ‘holidays’

John Fitzsimons
Written By:
John Fitzsimons

That’s the conclusion of a new study from Unbiased, a website which helps people find financial advisers.

The research found that more than half of those self-employed people who are currently saving into a pension had chosen to suspend or reduce their contributions as a result of the various Covid lockdowns, often because they had suffered a loss of income.

What is perhaps even more concerning is that the study revealed that more than half (51%) have no pension savings at all, while almost three in five (58%) were not paying into a pension scheme before the pandemic hit.

Even those who are contributing to a pension may not be saving enough. The Unbiased report found that the average self-employed pension contributions is at around 4.1%. That’s just over half the 8% minimum for regular employees who are auto-enrolled into a workplace pension scheme by their employer.

What’s more, self-employed workers are likely to be looking beyond a private pension for their income in retirement. Only one in three highlighted it as being one of their four main income sources once they retire, with the majority (71%) expecting the state pension to be the main source. 

Karen Barrett, CEO and founder of Unbiased, noted that self-employed workers have been among the hardest hit financially by the lockdown, and argued that it was understandable that some would be wary about pension contributions when their regular income has become so uncertain.

She continued: “Although taking a contribution holiday now might seem prudent, in reality it’s just kicking the problem into your future.

“Pension contributions are one of the most effective ways to save money, thanks to tax relief, so by reducing them you are actually losing out. Some people may feel that pausing their contributions is their only option for now – but they should aim to restore their saving levels as soon as they can. Otherwise, they may suffer a kind of financial “long Covid”, where the costs of the pandemic follow them into retirement.”

Providing more pension support to self-employed people

One of the most effective changes to pension saving in the UK in recent years has been the introduction of the auto-enrolment workplace pension scheme. This forces employees to open a pension on behalf of qualifying staff members, and contribute to it too.

It’s made a big difference to pension saving, with analysis from the Institute for Fiscal Studies (IFS) last year revealing that the membership of workplace pensions among private sector employees has rocketed from 42% in 2012 to 85% in 2018.

However, millions of people are locked out of workplace pensions. For example, as self-employed people are their own bosses, the workplace pension scheme doesn’t apply to them. 

The Department for Work & Pensions is conducting investigations with Nest Insights looking at ways to try to encourage more self-employed people to start pension saving, with proposed trials for a form of auto-saving mechanism which could work for those who enjoy a variable income. This could mean saving a percentage of income from invoices paid through an accountancy software platform.