Self-employed missing out on pension reform

The ranks of the self-employed are growing rapidly in Scotland as more people opt to go it alone and work for themselves.

The self-employed can tailor their pension contributions to their cashflow. Photograph: iStockphoto/Getty

Yet they are still paying a financial price for their independence, being ignored by policymakers and left behind by financial services providers, experts warned last week.

There are now 4.79 million self-employed workers in the UK, according to new figures from the Office for National Statistics, after an increase of nearly 300,000 in the three months to the end of May alone. They include 300,000 people in Scotland, according to the Association of Independent Professionals and the Self-Employed (IPSE).

It said the Scottish Government had “missed a massive opportunity” in its recent Labour Market Strategy report to recognise and support the “growing army of Scots” in self-employment. The 43-page report, published late in August, mentioned the self-employed only once, said the IPSE.

But the Scottish Government isn’t alone in being accused of overlooking the self-employed. Pensions policymakers are being urged to extend automatic enrolment to self-employed workers, while mortgage lenders are under fire for making it too difficult for the self-employed to secure mortgages.

Just one in five self-employed workers, or 765,000, are saving into a pension, according to analysis published last week by Nest, the workplace pension provider.

Nest was set up by the government specifically for auto-enrolment, the workplace pension programme that began four years ago this month. It said that 6.5 million workers are now saving into pensions after being automatically enrolled into their employers’ scheme, with fewer than one in ten opting out.

Self-employed workers remain outside the scheme, however – which means the pensions gulf between that group and other workers is widening rapidly.

They may be saving into products such as Isas, but they won’t be getting the tax relief available on pensions, or the employer contributions typically paid on workplace plans.

Nest calculated that a 22-year-old on the average wage of £22,900 could retire at 65 with a pension pot of around £150,000, assuming they pay 8 per cent of their salary into their pension.

“Auto-enrolment has started a pension revolution, reversing the decline in pension saving and giving millions an opportunity to save for their retirement. It’s great to see the difference it’s making,” said Debbie Gupta, executive director of corporate services at Nest.

“In the last four years, over 6.5 million workers have started saving for their future. However, there’s a risk that millions of self-employed workers are getting left behind.”

One business owner in Scotland admitted he needed to be cajoled into opening a pension when he became self-employed.

Malcolm McCurrach, owner of Edinburgh-based photography firm New Wave Images UK, said: ‘I’ll admit, my wife did give me a little bit of a nudge to get a self-employment pension set up, and I’m glad she did. I have a direct debit paying into my Nest pension every month.

“I find it really flexible because I have the choice of whether to dial it up or down as my cashflow changes. Generally though, I put in the same amount each month and feel peace of mind that I am setting aside something for my future.”

Schemes such as Nest aren’t the only option for self-employed workers wanting to set up a pension. Low-cost personal pensions are available which will accept both regular and single contributions, said Trent Lyons, financial analyst at Chiene + Tait Financial Planning in Edinburgh.

“An advantage of being self-employed is the option to assess the performance of the business for the course of a year and determine the level of funds that can be contributed to a pension at the end of the tax year,” he said.

“Those who advise self-employed individuals should challenge the retirement planning being employed and educate their clients about the tax-effective nature of the pension environment.”

While personal pensions don’t benefit from the employer top-up that boosts most workplace pensions, there is still tax relief from the government. This is paid at your marginal income tax rate, which means that for every £80 paid in by a basic rate taxpayer, the government adds another £20 in tax relief.

Higher rate taxpayers get tax relief at 40 per cent, so they only have to pay in £60 for every £100 contribution to their scheme, while additional rate taxpayers get tax relief at 45 per cent. This may soon change, however, with speculation over the future of tax relief ahead of next month’s autumn statement.

Self-employed workers are also at a disadvantage when it comes to mortgages. One in eight self-employed borrowers have been rejected for mortgages or remortgages, research by Nottingham Building Society found.

Many self-employed borrowers are turned down for mortgages due to problems of proving income and affordability. Yet almost half of such borrowers say they are earning at least the same since going it alone. One in three mortgage brokers saw an increase in self-employed mortgage applications last year and 86 per cent of brokers want more mortgage choice for that market.

Self-employed borrowers are paying the price for the industry’s “computer says no” culture, said Matt Andrews, managing director at Bluestone Mortgages.

“Despite the nature of the UK workforce changing significantly over the past decade, many mainstream lenders have failed to update their attitudes to borrower profiles to keep pace with this evolution. As a result, a large section of the UK workforce struggles to access lending, as they still fall outside of conventional credit scoring models,” he said.

“Hundreds of the UK’s new business owners and freelancers gained years of experience in their chosen fields before opting to become self-employed, but they still lose out on the best rates and products when applying for a mortgage.”