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Consumer Credit Self-employed resilience gaps
What are the issues for self-employed professionals and why may they not be as bad as they seem?
Sarah Coles Senior personal fi nance analyst, Hargreaves Lansdown
Self-employed people are far less likely to have the insurance they need, and face worrying pension gaps. Only 22% are on track with their retirement savings, compared to 43% of employed people. However, self-employed households are
more likely to have enough cash savings – 78% compared to 74% among employed people, and on average they hold £15,182 – compared to £12,151 among employed households. There is also more likely to be some money left over when the bills are paid, 63% compared to 60% for employed people. Some self-employed people have chosen
to invest elsewhere for their retirement. Some 21% have invested assets – compared to 16% of employed people. Figures from the fi rst HL Savings and Resilience Barometer, produced with Oxford Economics, in January 2022. Alarming pension gaps for self-employed
people are the stuff of nightmares, with four in fi ve people failing to put enough money into a pension, and risking huge shortfalls in retirement. However, when you look at overall fi nancial resilience, things are not as bad as they seem, and self-employed people have some huge strengths too. Overall, self-employed people are less
fi nancially resilient than their employed counterparts, One major weakness is when it comes to preparing for the unexpected. They will not have sick pay, income
protection or life insurance through the workplace, and many of them have not closed the gap. There is a signifi cant diff erence between the proportion of self-employed people who have enough protection in place (33%) and the total population (42%). There is also a particularly alarming
self-employed pension gap. The fact that self-employed people don’t benefi t from
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automatic enrolment into a workplace scheme, and will never get an employer top-up, means self-employed people need to work much harder to save for retirement. Unfortunately, there is every sign it is not a priority. Figures from the Family Resources Survey for 2020- 2021 found that only 19% of self-employed people were paying into a pension, compared to 80% of employed people. In some cases, they may have chosen to
save into a Lifetime ISA instead. Basic rate taxpayers, who expect to pay basic rate tax in retirement, and who are aged 18-39, may be better paying the fi rst £4,000 a year of retirement savings into a LISA. It eff ectively gets the same tax relief as a pension on the way in for this tax bracket, but income is tax free on the way out. For employed people the employer contribution means it is usually a better fi rst port of call, but without this to benefi t from, self-employed people may prefer to start with the LISA.
Pension For those who have not saved into a pension or a LISA, there is a risk they will not have anything else to fall back on, so this could mean
hundreds of thousands of self-employed people are set for a far less comfortable retirement than they may be expecting. In some cases, however, self employed people have chosen to prepare for retirement another way. They are slightly more likely to invest in the stock market, but much more likely to invest in property: 19% own a second property compared to 12% of employed people. Of those with property wealth, the
self-employed have £84,550 invested on average compared to £50,000 for their employed counterparts. This is likely to owe much to the fact that one in six self-employed people work in building construction or specialist construction services. The idea of buying a second home and
doing it up for rental or sale is much more appealing when you have the skills to do the work yourself.
Tailor
For those who have not saved into a pension or a LISA, there is a risk they will not have anything else to fall back on, so this could mean hundreds of thousands of self-employed people are set for a far less comfortable retirement than they may be expecting
www.CCRMagazine.com
Self-employed people have also had to tailor their lifestyle to fi t a possibly fl uctuating income, so many of them have money left over at the end of the month. Among the middle fi fth of earners, the average employee has £198 in surplus income, and the average self-employed person £477. However, it is important to bear in mind that self-employed people may well make their income before tax, and only pay it twice a year. These strengths do not make up for the fact
self-employed people have lower resilience in general. And it is important to view your fi nances as a whole, to be sure you have not let any gaps open up while you were busy running a business. However, for anyone alarmed by the self-employment pension gap, the context off ers a little reassurance. CCR
March 2022
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