Derin Clark

Derin Clark

Online Reporter
Published: 07/11/2019

While there is a rising number of workers choosing to become self-employed, they could end up facing a £115,300 pension shortfall when reaching retirement, research from Aegon has found.

According to the research, there are currently five million self-employed people in the UK, however those taking the leap into self-employment at age 35 after 10 years as an employee in a workplace pension scheme could find themselves £115,300 worse off at state pension age.

Aegon states that the reason why those who are self-employed are facing a shortfall is due to the fact they do not benefit from an employer contributing towards their pension pot. As of April 2019, the minimum employer contribution level under the auto-enrolment scheme is 3%, however according to Aegon, many employers will pay more than this or even match personal contributions.

Steven Cameron, pensions director at Aegon, said: “Auto-enrolment has been a big step in the right direction for many employees to kick-start their pension savings, but the self-employed who don’t benefit from this find themselves lagging behind. The latest data from HMRC shows the self-employed receive only 1.5% of the overall pensions tax relief granted by the Government, which is concerning considering they make up around 15% of the UK’s labour market.

“As well as making pension saving the default, auto-enrolment has meant employees benefit from valuable employer contributions, which boosts their retirement savings. The self-employed miss out on this and the figures show a 25-year-old employee on average earnings who decides to become self-employed after 10 years and keeps paying a pension contribution at the employee level of 5% of earnings could miss out on around £115,300 by state pension age from not receiving employer contributions. This assumes wage growth of 3% and investment growth on the funds of 4.25% after charges.

“Saving for retirement is often very difficult for the self-employed as many have highly variable earnings and often face foregoing income to invest in growing their business. However, where they can, individuals should look to not just maintain personal contributions at 5% but increase them as soon as their employer contributions are lost. Leaving this until later on in life will make it considerably harder to catch up and bridge the gap with employees.”

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