Recession rips into freelancers' retirement pots

The recession has ripped into nest eggs belonging to the self-employed, as almost half of such workers admit to having nothing in the pot for when they retire - typically because they can’t currently afford to set money aside.

In fact, 46% of one-person businesses have no private pension, meaning many will rely on the state, of whom nearly six in ten said cash for retirement hadn’t been stashed as doing so wasn’t financially viable.

Even among those self-employed people who do have their own pension, more than a quarter say they have put contributions “on hold” since the downturn, confirming fears that the malaise has made saving for retirement less of a priority.

Prudential, which unveiled these findings, was unable to suggest that the trend of self-employed people not saving for retirement would ease once conditions improve as, when those with no pension were asked, the majority said they wouldn’t open one in the future.

Reasons for not having a pension were mixed. Almost a fifth of the self-employed sample (of more than 400 one-person business owners) said they didn’t save for retirement because they will never stop working, while others said they would rely on their partner’s pension.

Such respondents, alongside those who plan to fund their retirement from selling their business, are in addition to the one-third of self-employed people who plan to rely entirely upon the State Pension.

“[The State Pension] should actually be a safety net, not a default source of income,” said Stan Russell, retirement expert at Prudential.

A pensions specialist for contractors, ContractorMoney says that, in its experience, the notion of relying on the state to fund themselves once they stop work “fills many freelancers with absolute dread.”

IFA Tony Harris, the founder of ContractorMoney, added: “Thankfully our experience shows that the UK’s contractor community are often in far better shape than the [Prudential] survey suggests.

“Many contractors will use their pension allowance as a very effective way of transferring money from invoice to personal hands without any deductions from HM Revenue & Customs. This applies equally to those freelancers working via a personal services company or an umbrella company.”

But pointing to the findings, Mr Russell said it seemed “hard for self-employed workers to distinguish” between their business finances and their personal finances

He added: “Often, investing in the business takes priority over saving for retirement – an issue that is particularly prevalent now, given the tough economic conditions facing UK businesses.”

Prudential warned that many self-employed people not building a nest egg face both a “real income shock and reducing living standards” when they become retirees, on top of the possible strain of finding finance for potential “health issues”.

“Some business owners plan to supplement their retirement incomes with alternative sources of finances”, the advisor reflected “[but] pensions offer huge tax advantages, and business owners who have not made any retirement provision should seek advice from a financial adviser without delay”.

ContractorMoney agreed: “As such it’s rarely a case of us discussing plans for retirement with clients, it’s more often about the tax savings to be gained here and now.

“That said, the tax planning put in place today can reap very significant returns after a freelancer’s working days are over. With added flexibility as to how and when benefits can be taken, we find contractors very receptive to the notion of investing for the future.”

If the warnings are heeded, it seems IFAs will be dealing with enquiries from women more than men, as Prudential found that 59% of self-employed females have no pension, compared with 37% of self-employed males.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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