Entrepreneurs, are you paying enough into your pension?

Like many entrepreneurs, Caroline Dabney-Rourke has no private pension provision. Following a career change a decade ago, the 59-year-old from West Sussex runs AllezNutrition, a mobile catering company for cyclists. To fund her retirement at 64, she relies on income from a buy-to-let property, to which she can add a full state pension from age 67.

Recently, though, the profit she gets from the property has picked up something of a slow puncture.

“Over the years the rents have increased but I’m in a bit of a trap because of increased mortgage costs. My mortgage has gone up [by] almost three times, so the margin is not as great.”

Although she still thinks she’ll have a comfortable retirement, she hopes interest rates will be lower in 18 months, when she plans to refinance.

Dabney-Rourke is one of the growing number of people in self-employment in the UK — up by more than a third since the beginning of the 21st century to 4.3mn. While there’s much to celebrate in the boom in entrepreneurship, when it comes to retirement planning, self-employed people are at a significant disadvantage as they do not benefit from auto-enrolment or employer contributions to their pension pot.

A report this week from pension provider Scottish Widows found that four in 10 self-employed people are not on track for even a minimum standard of retirement lifestyle — which, according to the Retirement Living Standards, based on research by Loughborough University, is £14,400 a year for a single person.

It’s difficult to find time to think about long-term saving, which means today only two in 10 self-employed people contribute into a personal pension

That includes the state pension, available from 66, rising to 67 in 2028, which is currently £11,502 a year, if you have a full record of national insurance contributions. It’s not to be sniffed at — to buy an £11,500 index-linked pension would cost between £250,000 and £300,000 from an insurance company, says Richard Parkin, head of retirement at BNY Mellon Asset Management — but is hardly enough to live in comfort. Only 28 per cent of self-employed workers are on course for a “comfortable” retirement — considered to be £43,100 a year for a single person — compared to 41 per cent of full-time employees.

“The hidden underside of a choice to go self-employed can be a scary lack of long-term financial security,” says Becky O’Connor, director of public affairs at PensionBee. “Without the cushion of employee benefits, such as workplace pension schemes, life insurance and private medical insurance, self-employed people can find themselves reliant on good fortune, hoping week to week that nothing goes wrong.” 

Experts agree that self-employed workers in the UK face an almighty pensions squeeze in the coming decades. So what’s causing it? And what can savers do now to relieve the pressure on their own retirement?

Ask an entrepreneur about their retirement planning and they may reply with a hollow laugh. With the pressures of keeping a business afloat from month to month, saving into a pension pot can fall down the list of priorities.

“Running a business can feel overwhelming and means wearing many hats,” says Jackie Leiper, managing director of pensions at Lloyds Bank. “It’s difficult to find time to think about long-term saving, which means today only two in 10 self-employed people contribute into a personal pension.”

Grant Hutton, chartered financial planner at Hunter Wealth Management, became a self-employed independent financial adviser (IFA) at 31 in 2016, while also a new parent. “I had no guaranteed income and although looking back I always made enough each month, it was tough psychologically to lock a few hundred pounds away knowing you couldn’t get it if you suddenly had a few quiet months,” he says. 

Many opt for Isas instead, says Craig Rickman, personal finance expert at Interactive Investor. “Isas have obvious appeal for the self-employed as they can access the money before retirement without any tax implications should they encounter any cash flow problems.”

Amanda Walls, 37, who runs Cedarwood Digital, a marketing agency, says: “I’ve never been a huge fan of pensions — predominantly because of the lock-in until 55.” She prefers a mix of investments, held in a stocks and shares Isa, and property. “For me, property is something which is tangible and over time will generally increase in value while also providing accessible cash if for instance I did need it,” she says.

It’s a common attitude among self-employed people, but it’s not necessarily advisable. Property investment is less tax efficient than pensions; tenants can be difficult to manage; capital gains are uncertain — in some parts of the UK, house prices have yet to recover to 2007 levels after adjusting for inflation — and properties can be subject to capital gains tax when you sell.

For self-employed women raising children, pension planning can be even more difficult. Joanna Drake, founder of independent communications consultancy Rosebud Media, fell into what she describes as the “typical female pensions gap”. She paid in diligently during her 20s but in her early 30s began working for a business without a pension scheme and never got around to setting up a personal pot. “Throw in two maternity leaves and the financial pressures of having small children, and I eventually ended up going almost 10 years without paying into a…