Tony Harris looks at the factors behind self-employed people's reluctance to pay into pensions.
A recent report by the Resolution Foundation suggests there is a chronic lack of pension saving among the self-employed.
According to an Ipsos MORI survey, 66% had no form of personal pension at all, and alarmingly only 39% of people aged 60+ have a pension. There is additional evidence of a gender gap in provision with only 20% of women compared to 34% of men actively contributing.
In our role as specialist IFAs to the UK's contractor community it came as no surprise to us the report concluded that small business owners, the self-employed and freelancers face a challenge trying to make pension provision.
By definition, modern day entrepreneurs will not have the cosy 40 year service in a defined benefit scheme. However, instead of making personal provision throughout their business lives they will almost always concentrate far more on building up their cash flow and establishing their business.
Those who understandably choose to delay their pension plans now find themselves being penalised by the Chancellor who has reduced the annual allowance from £50,000 to £40,000, restricting the ability for wealth creators to get their pension back on track in time for retirement.
To compound the problem for late starters there is also a suggestion that, in the face of a mounting bill for pension tax relief, pensions minister, Steve Webb could implement an effective 33% flat rate of pension tax relief. The proposals also recommend a further reduction to the annual allowance to a gross contribution of £12,000.
Selling a business
The Resolution Foundation report suggests that some small businesses, self-employed, contractors don't invest in a pension as they believe they can sell their business on retirement so traditional pension planning is less important.
This is dangerous in that much of the value of these enterprises is based on the individual being the business driver.
The business could therefore be worth a lot less without them being involved and could mean that the fund realised on any sale could be far less than hoped for.
It could also be very dangerous for those working for themselves to put all their retirement eggs in one basket, heavily relying on the sale of the business to fund the future.
We consider it vitally important to remind clients that traditional pensions are an efficient way of transferring money from business into personal hands without the outcome being reliant on the lifecycle of the trade in which the entrepreneur is involved.
What should the Government be doing to help this growing community of workers in the future?
The Government is proposing the single-tier State Pension in 2016 with the opportunity for all self-employed business people to be fully brought into the scheme.
Invariably accountants will advise incorporated business owners to fix their salaries sufficiently low to avoid undue amounts of NI but high enough to be entitled to state benefits so this move to a flat rate should greatly help entrepreneurs when it is introduced.
While this is a step in the right direction, even with the enhanced rates to be applied in 2016, the state pension will still represent a significant drop in earnings for most of the self-employed.
The recommendation of advisers must be for these clients not to rely solely on the state to fund retirement and we urge the government not to restrict the annual allowance from its current level. Given the early years focus on building their business, current allowances are vital for entrepreneurs to make up for lost time. Given the growing importance of SMEs and freelancers to UK PLC, any pension changes that could deter business men and women from setting out alone must therefore be resisted the Government .
Today many people expect to work longer but more flexibly and increasingly consider self-employment as a desirable goal.
The changes made in this year's Budget in terms of how pensions can be drawn are beginning to offer potential for a far more dynamic way of looking at our working lives, which can only be of benefit to the economy.
To ensure that wealth creators don't sacrifice their long term financial security to the country's needs for an enterprise culture, professional advisers and government will need to proactively place pension planning at the heart of their respective recommendations and policies.
Tony Harris is managing director of ContractorFinancials
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