Self-employed losing out on pension contributions

07 Nov 2019

Self-Employed Could Miss Out on £115,300 in Pension Pot

Those who opt to become self-employed in their mid-30s could face a pension shortfall of £115,300 by the time they retire, according to research by Aegon.

Findings by the pensions firm show that a 25-year-old on an average salary who contributes to a workplace pension for 10 years before becoming self-employed, could lose out on £115,300 when they reach state pension age.

Those with workplace pensions benefit from employers topping up their pension fund by a minimum of 3% every month, in addition to their own 5% contributions. While some employers match or exceed employee contributions.

Official figures show that some five million people in the UK are currently self-employed, which is 15% of the UK labour market.

Steven Cameron, pensions director at Aegon, commented: “Auto-enrolment has been a big step in the right direction for many employees to kick-start their pension savings, but the self-employed who don’t benefit from this find themselves lagging behind. The latest data from HMRC shows the self-employed receive only 1.5% of the overall pensions tax relief granted by the Government, which is concerning considering they make up around 15% of the UK’s labour market.

“As well as making pension saving the default, auto-enrolment has meant employees benefit from valuable employer contributions, which boosts their retirement savings. The self-employed miss out on this and the figures show a 25-year-old employee on average earnings who decides to become self-employed after 10 years and keeps paying a pension contribution at the employee level of 5% of earnings could miss out on around £115,300 by state pension age from not receiving employer contributions. This assumes wage growth of 3% and investment growth on the funds of 4.25% after charges.

“Saving for retirement is often very difficult for the self-employed as many have highly variable earnings and often face foregoing income to invest in growing their business. However, where they can, individuals should look to not just maintain personal contributions at 5% but increase them as soon as their employer contributions are lost. Leaving this until later on in life will make it considerably harder to catch up and bridge the gap with employees.”

By Melissa Jones