Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Pension participation has boomed under auto-enrolment – with 79% of employed people contributing to a scheme. However, the same can’t be said of all groups – the self-employed still shun pensions and risk being left behind.
There are many reasons for this. They aren’t covered by auto-enrolment so don’t have the convenience of being placed into a pension scheme. If they want to contribute to a pension, they need to do all the legwork in finding the best one for them and the reality is many may not have the time. They also miss out on an employer contribution. Added to this variable, income patterns can make it difficult to contribute regularly and many will be put off by the fact that you can’t access the pension until age 55 (rising to 57 in 2028). This means the self-employed can struggle to save, with the latest data from HL’s Savings and Resilience Barometer showing just 21% of self-employed households are on track for a moderate retirement income. This compares to 43% of employed households.
A Lifetime ISA can play an important role in helping the self-employed prepare for retirement. The 25% bonus on contributions up to £4,000 per year has the same effect as basic rate tax relief on a pension. Added to this any income taken from a LISA is tax free.
For those worried about tying up their money, the LISA allows you to access your money before the age of 60 in the case of an emergency though it will be subject to an exit penalty. This could bring some much-needed flexibility to people’s retirement planning.
Further reform could make the LISA even more attractive. Reducing the early exit penalty from 25% to 20% would remove the situation where someone accessing their money not only loses their bonus but also a chunk of their own saving. Enabling people to open and contribute to a LISA up until the age of 55 (currently the over 40s can’t open a LISA) would be especially useful for those who become self-employed later in life.
Self-employed people earning higher and additional rate tax will continue to favour the pension because of the extra tax relief, but these changes could still help many people. Previous HL analysis shows such tweaks could help more than 1.2 million households with a basic rate tax paying self-employed earner to build a more resilient retirement fund.”
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