Retirement Savings for the Suddenly Self-Employed

Being self-employed for most people in the UK used to be a matter of choice. While it still is for some, for many, sudden self-employment is something that has been forced on them by the effects on employment of the COVID-19 pandemic.

Unemployment in the 1st Quarter of 2021 Better than was Feared

According to the Office for National Statistics, the unemployment rate from January to March 2021 was 4.8%. It equated to around 1 in every 20 people, more than before the start of the outbreak.

But the good news is that despite the continuance of lockdown measures during this period, the actual rate of unemployment fell a little since the autumn. It came as a surprise to many economists who expected the rate to be significantly higher. It is due in part to the UK government diverting billions of pounds into supporting employment.

Unemployment Expected to Peak at 5.5%

The Bank of England expects the umemployment rate to get higher, peaking at around 5.5% later in the year. One reason is the ending of the furlough scheme. Whichever way you look at it, it means more people will find themselves suddenly unemployed, and some will inevitably jong the ranks of the self-employed.

Not enough people saving for their retirement

According to Pensions Age magazine, a third of young savers are not saving enough money for their retirements. In addition, an analysis by The Investing and Saving Alliance (TISA,) discovered that two-thirds of 50 to 65-year-olds were undersaving for retirement, and it confirms that unless something changes, there are going to be some very poorly off people when they hang their working shoes up.

Tax Relief and Workplace Pensions

For those lucky enough to still be employed, and in a workplace pensions scheme, and who earn more than £6,240 per annum, their employers have to contribute. Many also get help from the government by way of tax relief, meaning that some of the money would have had to have paid in income tax, is, instead, diverted into their pensions.

The tax relief that gets paid into workers’ pensions falls into one of two categories – relief at source or the net pay arrangement.

Relief at source is when your employer deducts your pension contributions from your wage after deducting income tax and national insurance. Whoever your pension scheme provider is, then claims that tax back from the government at the 20% basic rate and puts it into your pension pot.

The net pay arrangement is when your employer deducts your pension contributions plus those made by the government as tax relief from your wages before taking off income tax, and you pay tax on the remainder. It means that if you don’t pay tax, there is no tax relief as when you are paid below the taxable threshold.

But what about tax queries in respect of pension contributions and your business when you are self-employed?

The Numer of Self Employed Reaches 5 million

There are now approximately 5 million self-employed workers here in the UK, and economists are concerned that many will face financial difficulties when they come to retire. Whereas employees have the safety net of their employers having to sign them onto the government’s auto-enrolment scheme, the self-employed must organise their funds for their retirement.

Once you become suddenly self-employed, understandably, your immediate focus is on the here and now rather than the future. The temptation is to worry about long-term savings once you have got your new business up and running. Gone are the comforts of a holiday, sick pay, and income protection that permanent employment offers. Being self-employed is a whole new ball game.

Several small technology companies are now launching apps and platforms to make it easier for self-employed people to start a pension. PensionBee, for example, makes it easier for savers to amalgamate their old pensions into a single new pension vehicle.

The Importance of Accessible Savings

The problem with many pension schemes is that once money has been paid into them, it is inaccessible until retirement or at least until you reach 55 years of age. When you find yourself suddenly employed, you may need every penny you earn to just get by.

This is where an ISA can come into play. The funds you invest in, say a stocks and share ISA, can be accessed if needs must. And as with any of the ISAs (apart from the Junior ISA), you can save up to £20,000 per annum tax-free. It’s a very efficient way of saving, and because you invest in stocks and shares, the interest is much higher than on a standard Cash ISA.

An ISA is certainly tax-efficient, not just in terms of contributions, but with the interest and withdrawals all being tax-free too. It’s something well worth considering providing you are willing to risk investing in stocks and shares.



Award-winning writer, blogger, social media consultant and charity campaigner. Social Media Manager for BritMums, the UK's largest parent blogging network Freelance clients include Firefly Communications and Save the Children UK. Works with brands on marketing projects. Examples include Visit Orlando, Give As You Live, Coca-Cola and Kodak. Cambridge Law graduate with many years experience working across three sectors in advice, media relations, events, training and project management. Available for hire at affordable rates.

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