Budget 2021: Sunak announces pension lifetime allowance freeze
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Self-employed workers have been hit hard by coronavirus, as SEISS eligibility problems left millions without support and recent IR35 changes raised costs across the board. This is all on top of existing pension contribution issues, with the lack of employer support costing freelancers billions.
In late-March, interactive investor calculated there are around 4.5 million self-employed people in the UK missing out on an estimated £4billion in employer pension contributions a year.
It was estimated that four in five of all self-employed workers are not putting any money into a pension at all.
Pension contribution rates among the self-employed rose to 18 percent in 2019/20, up from 16 percent in 2015 but “even so”, interactive investor highlighted this equates to roughly 3.5million people who are not making their own contributions.
These are people who are obviously not getting employer contributions and are missing out on tax relief which could be awarded if they set up their own pensions.
The tax relief forgone alone by these 3.5 million people is estimated to equate to around £1billion a year, based on basic rate relief.
interactive investor illustrated how these realities could paint a bleak picture for the future of self-employment: “The scale of estimated total missed employer contributions underlines the need to address the huge gap in pension provision between self-employed people and employees, to prevent self-employed people facing poverty when they eventually stop work and becoming dependent on the state pension or pension credit; or alternatively, having to continue working past state pension entitlement age.
“For example, for a full-time employee on median pay of £31,461, the total eight percent pension contribution (percent of gross salary) in one year would be £2,516, typically made up of an employee contribution (five percent) of £1,573 including tax relief (one percent) of £314 and personal payment of £1,258, as well as an employer contribution (three percent) of £942.
“Meanwhile, a self-employed person earning the same amount and paying in the same proportions of income would have to pay the additional £942, to put themselves on a level playing field with employed friends.”
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Becky O’Connor, the Head of Pensions and Savings at interactive investor, commented on these findings: “Pensions are likely to be the furthest thing from someone’s mind if they choose to go it alone. Especially during the pandemic, some hard-hit self-employed people have had more immediate and urgent things to deal with.
“But the amounts self-employed people could be missing out on in pension contributions through no longer being employed and receiving employer contributions are staggering.
“Self-employed workers are at a disadvantage when it comes to building up adequate retirement savings because they tend to earn less, but also because they don’t have an employer to set up a pension for them or pay in employer contributions. This is something the Government needs to address as ultimately, the self-employed are more likely to depend on the state if and when they do stop work, if they haven’t set aside their own pension provision.
“But self-employed people can take action for themselves. It is important they are not tempted to cut the pension corner when they choose to go it alone – or else they may struggle for income when they get older (It’s safer to assume you will want to give up work at some point, rather than planning on working until you drop.)
“If you are self-employed, even if you don’t benefit from employer contributions, there is still the incentive of tax relief from the Government – effectively free money – on contributions into a personal pension. Tax relief is equal to 20 percent of your contribution if you are a basic rate taxpayer, 40 percent of you pay higher rate tax and 45 percent for additional rate taxpayers.”
interactive investor laid out the following number of reasons as to why it’s important for self-employed workers to set up their own pensions:
- Self-employed people still get tax relief at their marginal rate of income tax on their pension contributions, so even without employer contributions, pensions are still worthwhile investments for self-employed people. As illustrated above, for someone earning £31,461 on a self-employed basis, tax relief on pension contributions worth five percent of earnings would be £1,573 over a year (four percent personal contribution, one percent tax relief)
- You need something to live on when you stop work
- You may not end up working past retirement age, due to ill health or caring responsibilities
Becky concluded on this: “Personal pensions are available from some of the UK’s biggest pension providers and Self-Invested Personal Pensions (SIPPs) are also a good option for those who want more choice and control over where their pension is invested (for example, if you want to invest in ethical funds).
“Many personal pensions require small contributions to get started. If you put in £80 a month with tax relief at the basic rate of 20 percentautomatically added, your monthly contribution becomes £100 a month. Over the year, that would mean a contribution of £1,200 would cost you £960 in your contributions, with the rest added in the form of tax relief. Don’t forget, you should get some investment growth on top too, which should build up over time.
“Basic rate tax relief is automatically added by your provider, but if you are a higher or additional rate taxpaying self-employed person, you have to claim the additional relief through your tax return.
“While auto-enrolment has a minimum total contribution of eight percent from employees and employers, when calculating how much to pay into your own personal pension, consider that some experts think that contributions worth more like 20 percentof salary are now required to generate sufficient retirement income for most people.
“If you are going self-employed and trying to work out how much you’ll need to contribute to make up for the loss of employer contributions, then find out what your employer was paying in as a percentage, then add this to what you need to pay in yourself.”
This research caught the attention of Andy Chamberlain, the Director of Policy at the Association of Independent Professionals and the Self-Employed, who detailed: “This research tallies with our own findings on the worrying lack of pension saving among the self-employed. Our research – taken before the pandemic – showed that just 29 per cent of freelancers were saving into a pension.
“It is important to note, however, that pensions are a restrictive form of saving that simply doesn’t work for many self-employed people – who, because of natural fluctuations in their incomes, sometimes need to dip into their savings. Many, therefore, save for life using other financial products. For example, our research shows over a quarter (27 percent) of freelancers save using ISAs, while 14 percent have invested in stocks and shares and 12 percent are saving for later life with property investments.
“Even given these alternative methods, however, there is undoubtedly a savings crisis among the self-employed as nearly one in three (30 percent) have no savings of any kind for later life.
“This is also likely to have worsened with the financial strain of the pandemic – and as hundreds of thousands (27 percent of freelancers) have burned through their savings to get by. This is clearly an area where freelancers will need further support as the economy opens up in the coming months and years.”
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