Distinguishing yourself from a regular employee is one of the benchmarks of dodging the IR35 bullet.
A recent pensions report from the Resolution Foundation highlights one area where one-man-band contractors need to at least aspire to the way permies think, even if copying them is difficult.
The report analyses self-employed pension contributions since the turn of the century.
The results are massively at odds with the rise in volume of people choosing to go into business for themselves.
The two snippets that make the most interesting at-a-glance reading are:
- the widening of the self-employed/permie pension gap (male);
- percentage of self-employed actively contributing to a live pension scheme.
The Pension Gap
It’s one of the things we took for granted as an employee: employer pension contributions. Newsflash: there is no employer once you go it alone to navigate pensions for you!
The government has even adopted a TV campaign to highlight what an employer should be doing to help secure your future post retirement. Brainwashing? Well, not if you want something to live for after you’ve handed in your final timesheet.
When we leave that safety net of permanent employment, our focus becomes blinkered. In creating our business, continuity of work, accounting and marketing all take precedence.
To some extent, that’s wholly understandable. The destiny of the roof over our head, bills and our own lifestyle are all now very much in our hands.
The report adds other realistic explanations as to why fewer self-employed now pay into a pension fund.
What it doesn’t mention is the fact that many of the policies we had whilst learning our skill set as an employee are less advantageous as a contractor or freelancer.
Most pension schemes are irrelevant to the self-employed
To make the most of pension contributions, most self-employed people would love to contribute before they pay tax. If they’ve set up a limited company, a Relevant Life policy enables that.
But there are few other options available, which is why many representative bodies are leveraging the report to lobby the government.
The government must do more to help self-employed people save for life after contracting.
This is particularly true of freelancers. Many supply an inherent or learned creative service. The report suggests that one of the reasons this sector has tailed off making contributions is because they can sell their business upon retirement.
When your talent is your business, selling a business as a going concern falls down completely.
Who is contributing to self-employed pension schemes?
This argument is backed up by the second interesting tidbit. Here are a few dynamic facts and figures, set against the backdrop of a rise in the number of self-employed of 900,000 in this period:
- between 2001/02 and 2012/13, the number of self-employed people paying into a regular pension scheme dropped from 1.1M to just half a million;
- total contributions (adjusted in line with inflation) also almost halved, dropping from £3.4bn to £1.9bn;
- for those who kept their pensionn pot active, the average contribution actually rose by approximately 25%, from £2,994 to £3,760.
The report suggests that many who were part-time or on low income forfeited their contributions in the aftermath of the housing bust in 2008. That’s certainly when figures took their greatest slump.
But more telling is the type of self-employed individual who’s carried on contributing. The numbers change dramatically when the self-employed people themselves have dependent employees.
Those who take on staff are more likely to contribute than sole traders and independent freelancers and contractors. Leading by example or accepting the gauntlet of providing pensions for others may well be behind that shift.
With recent pension changes, it’s time for everyone (not just independent professionals) to review what the new pension laws mean to them. Moreover, if you’re self-employed and don’t fancy the commute across London into your nineties, now might be a good time to get your pension sorted.
Buck the trend in the Resolution Foundation report, as there really is no one else to pass the buck to when you’re your own boss.