The self-employed do save into other vehicles such as property and investments but pensions are less popular. They are also not covered by auto-enrolment so don’t benefit from an employer pension contribution.
The Lifetime ISA could particularly help self-employed people paying basic rate tax as the 25% bonus works in a similar way as basic rate tax relief on a pension contribution, but there is no tax when taking the money out after age 60.
LISAs are currently only available to people aged under 40 and there is a 25% penalty on withdrawals that are not for a first home, terminal illness or retirement.
HL is calling on government to allow people to open LISAs and receive bonuses on LISA contributions until the age of 55. We would also like to see the penalty on unauthorised withdrawals reduced to 20% for self-employed people.
Expanding access to the LISA for households aged between 40 and 55 could include an extra 680,000 households with a self-employed worker who pays the basic rate of tax.
Further, the reduction of the penalty could benefit 540,000 households under 40 with a self-employed worker who pays the basic rate of tax.
Moderate retirement income is as defined by the Pensions and Lifetime Savings Association. This is put at £23,300 per year and £34,000 per year for a couple. With a moderate income you cover all your basic needs plus have money left over for a foreign holiday, eating out and leisure activities.
Hargreaves Lansdown has published a report with Oxford Economics on how to boost the retirement prospects of the self-employed using data and analysis from the Savings and Resilience Barometer. Self employed resilience barometer report | Hargreaves Lansdown (hl.co.uk)
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown: “The self-employed are not fans of pensions. The ebbs and flows in their income can make it difficult to save regularly, they don’t benefit from an employer contribution under auto-enrolment, and they are unlikely to want to lock away most of their money until they are 55. This has led to a huge gulf when you compare their retirement prospects to their employed counterparts.
Data from the HL Savings and Resilience Barometer shows only 23% of self-employed households are on track for a moderate retirement income compared to 46% of employed households. They do use other vehicles such as property, cash savings and investments but when it comes to long-term planning the self-employed have fallen behind and in the current economic circumstances the gap is just getting bigger.
Lifetime ISAs (LISA) could be of real benefit to members of this group who have savings to put aside long-term but don’t feel pensions are quite right for them. Savings of up to £4,000 per year attract a 25% bonus so it works in a similar way to basic rate tax relief on a pension. If you don’t benefit from an employer pension contribution, then it’s a viable option. If money gets tight then you can access your LISA funds albeit subject to a 25% penalty.
If you are a higher rate taxpayer, then the 40% tax relief you get on pension contributions make pensions a better bet if you end up paying basic rate tax in retirement but LISAs can make a real difference to the prospects of those paying basic rate tax. Just 14.9% of self-employed led households aged between 18 and 39 are on track to have sufficient savings that would provide them with a moderate standard of living upon retirement. This share is only slightly higher for those aged between 40 and 55 (21.9%).
However, there are barriers that stop as many people as should from benefiting from a LISA. To begin with the penalty on unauthorised withdrawals is off putting as it not only takes away the bonus but some of your hard-earned savings too*. In addition, you can currently only open a LISA if you are aged under 40 which means many people are effectively locked out of a product that could really benefit them.
We are calling on government to reform the LISA regime to boost the retirement prospects of the self-employed. We want to see people able to open LISAs and receive bonuses on contributions until the age of 55. We would also like to see the penalty on early withdrawals reduced to 20% for self-employed people. This would enable them to save for the longer term knowing they don’t forfeit their own savings should they need to access the money.
Times have been tough financially, but self-employed people have built up cash savings. Some 62% of self-employed households have adequate liquid assets set aside. We advocate keeping 3-6 months of essential expenses in an easy access savings account but over and above this there is headroom for self-employed people to boost their long-term resilience through a LISA if the rules will permit it.”
Andrew Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed (IPSE) commented: "The self-employed have cause to maintain a greater level of financial liquidity to help them manage cycles in demand for their services, and to guard against threats such as late payment, non-payment, and unplanned expenditure.
With this in mind the self-employed can be more reluctant to put money out of reach until they retire – especially not without the added incentive of additional contributions by an employer and from the perspective of lower rate taxpayers comparatively greater tax relief. But this only delays financial detriment until later life.
As the UK’s only not-for-profit organisation dedicated exclusively to the self-employed, IPSE has long called for savings products to be better tailored to the realities of being your own boss and that’s why IPSE is backing these recommendations to extend the Lifetime ISA, which offers a unique opportunity to transform the savings landscape for the self-employed.”
Craig Beaumont, chief of external affairs at the Federation of Small Businesses, said: "As the UK's largest business group with around 150,000 small businesses and self-employed members, FSB is keen to support proposals to improve small business owners and freelancers’ savings for later life. Today’s proposal from Hargreaves Lansdown to improve LISAs is a useful suggestion.
Right now, the pensions system for this group remains a maze, with many instead planning to build and then sell their businesses for financial security in their old age.
We know this often happens too late and is contingent on external factors like a strong economy at point of sale and the maintenance of Entrepreneurs’ Relief (now rebranded as Business Asset Disposal (BAD)).
We are therefore calling for reforms that enshrine simplicity and flexibility, creating new digital tools around tax, accounting, online banking and savings. We should also find a new way for the 88% of the self-employed who are former employees to continue contributing with the scheme providers.”
*If you save £4,000 into a LISA you receive a 25% bonus of £1,000 bringing your total savings to £5,000. However, if you make an unauthorised withdrawal, you are charged 25% on that £5,000 which comes to £1,250.
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