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Another week means another new development in pension planning, as we learn that the Department for Work and Pensions are set to move the auto-enrolment goalposts once again.
The government’s auto-enrolment review published in December 2017 suggests that the eligible age should be lowered by four years t0 18. It states that this will potentially allow an additional 900,000 young people to contribute to their workplace pension and start planning for retirement earlier in their career.
The review estimates that the changes will equal around £24bn in additional pension contributions per year. They recommend that reforms are introduced in the mid 2020s and that contributions are calculated from the very first pound earned to bring extra funds into pension savings. This also means that those on lower salaries will be especially aware of the higher proportion of their income that is invested into the scheme along with higher employer contributions and tax relief.
The response has been wholly positive although key figures have expressed a desire to implement the changes more quickly to avoid the current generation of young people missing out on the auto-enrolment opportunity.
Auto-enrolment for the self-employed
But while the government are making moves to involve younger people, there is one key group of workers who are left on the outskirts: the self-employed.
First thing’s first – in general, self-employed workers are not pro-active when it comes to saving into a pension. A report from the Pensions Advisory Service (TPAS) recently found that less than a third of self-employed people are paying into a pension, and the statistics are showing no signs of improving. According to research from the Pensions and Lifetime Savings Association published in the Financial Times, the number actually fell from 1.1 million to just 380,000 between 2001 and 2015.
Back to the report, which states that the goverment plans to enhance current auto-enrolment success and “to build a stronger, more inclusive savings culture for future generations.” Regarding the self-employed, the review promises that the government will conduct “feasibility work” and begin to “test targeted interventions” in order to establish the most effective way for people to increase their pension savings. The focus will be similar to that of regular auto-enrolment, where efforts will be focused on shifting saving behaviours and raising awareness of the importance of pension savings.
Challenges Facing the Auto-enrolment Model
Changes are not expected to be implemented until the mid-2020s and there are currently no solid plans in place for if, how and when the self-employed will be integrated into the auto-enrolment machine.
They have met with some criticism for not considering the self-employed sooner to give people the best opportunity to save for a comfortable retirement. With the Department of Work and Pensions Review confirming that self-employer workers making up around 15% of the UK’s working population, this seems to represent a significant group of people.
One of the challenges is finding a solution that fits because the self-employed don’t present a “one size fits all.” The 4.8-million strong group represents a diverse demographic with different pension saving needs. The current auto-enrolment framework cannot be directly rolled out to fit their requirements as – in the case of sole traders – the worker and employer are the same person.
This upsets the basis on which the entire premise of auto-enrolment was established, therefore a different type of system would need to be designed including an opt-out.
Alternative Options for the Self-Employed
If you are a sole trader or a part-time worker, you are not currently able to access of the benefits of auto-enrolment but there are a number of other routes that you can take to fill the gaps in your pension coverage.
While auto-enrolment hasn’t quite acknowledged the significance of the self-employed, there are workplace pension schemes that have done. If you are not already aware of the National Employment Savings Trust (NEST), this is a workplace provider established by the government with a specific focus on auto-enrolment.
From March, they are required to accept any self-employed person who wishes to use the scheme as a personal investment option. It’s very easy to set up and you can make contributions as often as you like, although we would advise seeking expert advice before making the decision to join in case there is a better option for your circumstances.
Traditional Pension Planning
Alternatively, you can go down a more traditional route. Personal pensions and Self-Invested Personal Pensions (SIPPs) in particular offer a wide range of investment options although the latter may come with higher charges than the standard personal or stakeholder pension.
Personal pensions are a long-term investment policy that offers you two choices – to take either an income in retirement or a reduced income and up to 25% of the fund as a tax-free lump sum. Stakeholder pensionswork in a similar way but the pension must provide an income for retirement using a minimum of 75% of the fund, with the remaining 25% available as a tax-free lump sum.
The Lifetime ISA
Another solid alternative for the self-employed to take before auto-enrolment (hopefully) comes into play, is taking up a Lifetime ISA. This is not specifically designed for sole traders, but it is open to adults under 40, i.e. the younger generation of self-employer workers. It offers a way to support retirement savings and you can contribute up to £4000 a year until the age of 50. It includes a 25% government bonus on all contributions with all growth tax-free.
As it stands, we will hopefully soon find out more details on the government’s plans to design a system that effectively increases self-employed pension contributions. What we do know is that the solution needs to represent an affordable levy on income with a consensus reached by all stakeholders to ensure ongoing success. Watch this space – we’ll keep you posted.
If you are self-employed and would like tailored advice on the best form of retirement saving for your circumstances, contact Simmons Gainsford Financial Services today on 020 8371 5232 or email firstname.lastname@example.org
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