Women are going into business - so what is the problem?

Female entrepreneurs are stepping up in their hundreds of thousands, with many seeing self-employment as a source of flexible working that lets them balance working with family life. But in putting family first, many are sacrificing their future financial freedom.

UK women's self-employment increased nearly 150% between 1984 and 2018, according to the Office for National Statistics (ONS), and has been growing more quickly since the post-financial crisis downturn. In the last 10 years alone the figure of women working for themselves has jumped from 1 million to 1.6 million.

A major reason for women becoming self-employed is to avoid - or at least lower - the heavy cost of childcare on the family. The OECD reported in April that the UK has the most expensive childcare system in the world, with 35.7% of income being spent on it.

Mothers making the sacrifice to change their career or working pattern to bear the brunt of caring responsibilities can boost the family finances, but it risks their own financial resilience.

Research from LV=, the life company, reveals the precarious nature of self-employed salaries. Its survey in November of self-employed, part-time and contract workers found that, if an accident or illness prevented them from working, 30% would run out of money in less than a month.

More than half of self-employed workers (55%), it found, have no life insurance, private medical insurance, critical illness cover or income protection should they find themselves unable to work due to illness or injury.

While these issues also affect male entrepreneurs, the gender pay gap is currently 9% in favour of men on average, and much higher in some sectors. In the financial sector, for example, only 16% of female employees are among the top earners, according to Companies House data. This gender pay gap often means women who have moved from being employed to self-employed have far fewer financial assets to fall back on.

Justin Harper, head of protection marketing at LV=, says: "Although it has many benefits, working for yourself means that the responsibility for providing a financial safety net shifts from the employer to the individual."

Female entrepreneurs' long-term financial resilience is also at stake. Self-employed people are less likely to pay into a pension than their employed counterparts - 87% of eligible employees are in a workplace pension - compared with 15% of the self-employed, according to the ONS.

The percentage of self-employed people paying into a pension, 30% at the start of the decade, has halved. Women's pensions already lag woefully behind men's, a legacy of being in lower paid and often part-time work while doing the lion's share of childcare. Research by AJ Bell, the investment firm, suggests women who have entered income drawdown since April 2015 have an average pension fund worth £118,000 - 34% less than the average man.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, says the solution for women is not to shun self-employment, but to plan ahead and not let their own financial security slip down the pecking order of priorities.

"Self-employment can have a catastrophic impact on your retirement plans," she warns. "So the flood of women going into self-employment means that simply having more women in work is not automatically going to close the gender pensions gap.

"This does not mean self-employment is a bad idea: it can be an incredibly useful way to get work to fit into the rest of your life. It is just important to plan it carefully, commit to starting a personal pension and saving regularly for your future."

Women in Investment Festival

The Women in Investment Festival, in partnership with sister publications Investment Week, Professional Pensions, Retirement Planner and Investment Europe, is a one-day festival that aims to celebrate successful women in the industry. It is sponsored by HSBC Global Asset Management and will take place on Tuesday 3 March 2020 at The Brewery in London.

For more details on the line-up, and to buy tickets for the festival, please click here.

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