Self-employed? Why you are at greater risk of falling behind with retirement

When it comes to retirement planning, one group that often finds itself at a disadvantage is the self-employed.

Unlike their counterparts in traditional employment, self-employed individuals face unique challenges in setting up adequate pension arrangements. During the cost-of-living crisis, many are choosing to reduce private pension savings to meet everyday expenses.

With more people choosing to become self-employed, it is crucial to shed light on the risks faced by the self-employed and explore potential solutions to secure their retirement.

One of the primary reasons why self-employed individuals are at a greater risk of falling behind with retirement is the lack of access to an employer-sponsored pension scheme.

In a typical employment scenario, companies must provide at least some form of workplace pension that offers minimum employer contributions of three per cent and an overall contribution of eight per cent.

Introduced through the auto-enrolment campaign, workplace pensions are compulsory for all employees aged 22 and over, earning £10,000 a year or more.

In contrast, self-employed individuals must rely on personal private pension arrangements. While options like personal pensions, stakeholder pensions, and self-invested personal pensions (SIPPs) are available to them, the responsibility for setting up and contributing to these plans lies solely on the individual.

The absence of employer contributions means that the self-employed must shoulder the entire burden of saving for retirement, which can be challenging.

As mentioned, another factor that contributes to the retirement vulnerability of the self-employed is the temptation to prioritise short-term financial needs over long-term savings.

Without the structure of employer-sponsored pensions, it is easier for self-employed individuals to delay or neglect retirement planning altogether.

Expenses such as business investments and fluctuating income levels often take precedence, leaving little room for retirement savings.

As a result, many self-employed individuals find themselves facing a significant shortfall as they approach retirement.

What can self-employed individuals do to address these challenges and secure their retirement?

Here are a few steps they can take:

1. Start early: The power of compounding cannot be underestimated. By starting to save for retirement as early as possible, self-employed individuals can harness the benefits of long-term investment growth.
2. Set up a pension plan: Explore the various pension options available, such as personal pensions, stakeholder pensions, or SIPPs. Consult with a financial advisor to determine the most suitable pension arrangement based on individual circumstances and long-term goals.
3. Automate savings: Set up regular contributions to the pension plan. By automating savings, self-employed individuals can make consistent contributions without having to remember or actively manage their savings.
4. Monitor and adjust: Review pension arrangements periodically to ensure they remain aligned with changing financial situations and retirement goals. Regularly assess contributions and consider increasing them as income allows.
5. Diversify income sources: Relying on a single source of income as a self-employed individual can be risky. By diversifying income streams, individuals can reduce dependence on a single client or business and create a more stable financial foundation for retirement.
6. Seek professional advice: Working with a financial advisor who specialises in retirement planning can provide valuable insights and guidance tailored to the unique circumstances of self-employed individuals.

Self-employed individuals face greater challenges when it comes to retirement planning compared to those in traditional employment and should plan ahead with independent professional advice.