Don't let government delays postpone your retirement
Now that auto-enrolment for the self-employed isn’t expected until at least 2022, the onus is on business owners themselves.
Inertia is clearly a powerful tool.
Since the introduction of auto-enrolment in 2012, the number of those enrolled in a workplace pension scheme has risen to more than 9 million.1 Although forthcoming rises in the minimum contribution could yet encourage people to opt out, the current rate of uptake is already far in excess of what had been hoped for.
Inertia among salaried employees has been crucial to ensuring that the introduction of auto-enrolment wasn’t greeted with a wave of opt-outs. Yet for the self-employed, government inaction is having the opposite effect, leaving them without automatic workplace pensions help until at least 2022. (Some argue that this breaks a manifesto commitment to include self-employed pensions as part of new pensions legislation.)
Arguably, the self-employed should have been the priority. After all, the unpredictability of self-employment creates extra reservations about putting money into a pension as, until you reach 55 years old, you can’t then get it back if finances become strained. You also have to organise it all yourself, and do so without the financial incentives offered by many employers.
Yet official figures published by HMRC last September show that the number of self-employed workers contributing to a personal pension fell from 950,000 to 350,000 between 2006/7 and 2015/16.2 Prudential estimates that 46% of the self-employed lack a private pension,3
Perception is a great part of the problem. Figures released by the Pensions Policy Institute in October showed that just 28% of self-employed workers felt pensions were the safest way to save for their future, compared to 52% of those in employment; moreover, 53% were planning to access the value held in property to support themselves through retirement.4
Savings recalcitrance among the self-employed and delays on the part of government make for a dangerous combination. While the government may feel it can afford to postpone some kind of automatic pension scheme for the self-employed,5 those working for themselves cannot afford to miss out on the next four years of pension contributions – especially given that most self-employed are already saving too little for retirement.
In fact, even the government recognises the severity of the issue, as Guy Opperman, the pensions minister, made clear at the Conservative Party Conference last year. “There is no doubt that the most important thing is that we extend auto-enrolment to the self-employed,” said Opperman. “[But] there is no simple solution.”
Those who work for themselves might wince at the government’s failure to meet a stated priority quickly. Yet they also need to recognise that the delay makes it all the more urgent to plan for retirement themselves – and to begin to chip away at any pension shortfall.
Despite the lack of an automatic scheme, the self-employed still benefit from the allowances included in a personal pension. For example, tax relief is available on contributions, usually up to £40,000 per year, albeit subject to limitations.6 For every 80p you contribute to a pension, the government automatically adds 20p in tax relief. Higher earners can claim extra tax relief through their annual tax return, meaning that a £1 pension contribution can effectively cost just 60p.
Moreover, if your business is incorporated as a limited company, you can make pension contributions straight from your company as an employer contribution. This counts as an allowable business expense, making it eligible for corporation tax relief; thus the company could save up to 20% in corporation tax. Moreover, employers are exempt from National Insurance Contributions on pension contributions.
Nevertheless, there are several HMRC rules covering such usages that complicate the picture for those seeking to use employer allowances. Moreover, it is not always easy to know which pension to choose. It is worth taking advice from an expert to be sure you are making use of your allowances, without falling foul of any of the rules.
The greatest danger, however, is delay. Pension contributions have the greatest effect the earlier they are made. The government may be happy to delay, but small business owners should be aware of the cost of inertia.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
2 https://www.gov.uk/government/uploads/system/uploads/attachment_data/ file/647545/September_2017_Pensions_publication.pdf
5 A number of proposals have been floated, among them: an auto-enrolment scheme (potentially triggered by the self-assessment tax return); a transition scheme whereby the newly self-employed continue to contribute to their old workplace pension; encouraging the use of alternative long-term savings products such as the Lifetime ISA.