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How Self Employed Pensions are Becoming Another Victim of COVID

5 million Brits are currently self-employed, representing over 15.3% of employment and yet over half of those have no private pension provision in place at all, which leaves a staggering 2.5 million people to rely on the meagre state pension to see them through their retirement. And for those wondering why relying on the state pension is a bad idea, the most you can get is £175.20 a week, a far cry from the £635 most people require per week to survive their retirement comfortably.

Self-Employed Woman Working

As if these figures weren’t bad enough, the news continues to get worse, with COVID forcing the few self-employed who are already saving for their retirement into potentially life changing decisions that include reducing their payments or even pausing completely. This is in response to the overwhelming number of self-employed people whose income has been affected by COVID and the resulting lock down, forcing them to look for ways to free up money to pay for everyday essentials. This is having a devastating effect on what were already sparse pensions.

Workplace pensions tend to outperform private pensions held by the self-employed even without the addition of COVID. With contributions from your employer, you, and the government, they are by far the most efficient way to save for retirement. Self-employed people tend to contribute less, and therefore receive a smaller government bonus, and in times of economic hardship, pension contributions are often the first cut back made.

Research is also suggesting that a large proportion of self-employed people who have previously been employed and therefore paid into a workplace pension, have forgotten about these pensions and left them languishing in poor performing funds. These ‘forgotten pensions’ would benefit from being consolidated and added to a personal pension in order to maximise on their returns.

Self-employed not on track for retirement

What’s interesting is research by Unbiased, recently revealed that only 9% of self-employed pension savers have reached the significant milestone of £100,000 saved for their retirement. This is enough for an income of £4,000 to £5,000 a year not including the state pension, however 11% have saved between £30k and £100k and the same number of people again have only saved under £30k.

Whilst these figures are worrying and would suggest that very few self-employed people are on track for retirement, it is important to take the ages of the savers into account as pension savings, like all savings, accumulate over time and it would stand to reason that older savers would have accumulated greater pension wealth than younger savers.

However, whilst this is certainly true, this data did throw up some surprises as whilst people have saved an average of £33,300 between the ages of 35-45, and £38,100 between the ages of 45-54, there is then a huge leap in the 55-64 age group who have saved on average £136,700.

How much do self-employed people have in savings?

Source: Unbiased. Research of 200 one-person businesses, Feb 2021

 

So why the sudden leap in savings later in life? One possible scenario that is likely is that the self-employed are more conscientious about saving for their retirement, the nearer they draw to retirement age. However, there is another important factor at play here. Compounding.

Compounding is often thought to be one of the most powerful tools when it comes to investing and saving. Compounding takes time to really reach its full potential, starting off small and steady, until it starts to have a significant effect on your savings. Compounding put simply, is when the interest or returns you earn on your savings, is reinvested, and therefore earns you more interest. This is the real meaning of ‘money makes money’. In this way, compounding effectively accelerates the growth of your savings.

As an example, let’s say you have £1,000 in your pension account and are earning 5% returns from your investments on that amount. In your first year you would earn £50, increasing your pension to £1,050. In year two you would earn 5% returns on your new balance, which would amount to £52.50, increasing your original balance to £1,102.50. Let’s imagine you left this amount in your pension for 30 years with the same 5% return on your investments year on year, your balance would have grown to £4,321.94 without you having to add a single penny.

Amplifying your savings

Pension contributions also work in this way, amplifying your savings as you go until you are earning returns on your investments that can have a significant impact on your balance. This is part of the reason why the older age group have saved significantly more, but conversely also the reason why pausing or reducing your contributions during COVID can have such a devastating effect on your bottom line. The sad reality is that half of all self-employed people who are saving into a pension have been forced into taking this action, a decision that will impact their lifestyle decades from now.

Self-employed pension provider Penfold, are quick to encourage their savers to resume their contributions for this reason, and 48% of self-employed pension savers have been able to continue with their contributions, with 5% even increasing their contributions during the pandemic. Penfold are also offering pension savers tools to help calculate exactly how much they need to save in order to achieve financial security in their retirement.

Penfold Pension for Self-Employed

It’s never too late to start your pension

Self-employed pension savers are being urged to resume contributions at the earliest possible time, in order to continue the ‘snowball effect’ that contributions have to the overall balance. As well as this, the 51% of self-employed people who currently have no pension provision in place that they know of are encouraged to consolidate any old workplace pensions into a provider like Penfold, and start taking advantage of compounding as soon as possible. It is never too late to start saving for retirement and even small, regular contributions will quickly amount to a sum of money that will have a significant impact on retirement.

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