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Lifetime ISA: the go-to pension for the self-employed

Less than a third of self-employed workers are paying into a pension but the government hopes the lifetime ISA will change that.

 

by Michelle McGagh on Apr 05, 2016 at 14:08

Lifetime ISA: the go-to pension for the self-employed

The lifetime ISA is expected to become the pension of choice for self-employed workers, two-thirds of whom currently save nothing for their retirement.

The lifetime ISA, which was introduced in the Budget, marks a more flexible way to save for the long term. The new ISA is aimed at helping younger people to save and the money put in to the ISA, as well as the government bonus, can be used to purchase a property.

However, the lifetime ISA also provides an attractive way for self-employed people to save for their retirement.

When they launch next year, savers will be able to put £4,000 a year into the ISA and the government will top it up with a 25% bonus – so for every £4 saved the government will give you £1. Savers are allowed to take out a lifetime ISA from ages 18 to 40, and are allowed to contribute until they are 50.

The maximum top up a person can receive from the lifetime ISA, if they save from 18 to 50, would be £32,000 on a personal contribution of £128,000. This is significantly higher than the average pension pot of just £40,000.

However, savers lose the bonus and will be hit by a 5% charge if they access their fund and do not use the money to purchase a property up to £450,000, or access the money before age 60 without buying a property.   

Adrian Boulding, pension expert at the Tax Incentivised Savings Association (Tisa), said the 25% up-front government bonus would be ‘hugely attractive’ to self-employed people, although he added it was broadly in line with the tax relief offered on pensions.

The main attraction, however, would be the flexibility offered by the lifetime ISA.

‘Self-employed people are reluctant to tie their money up in a pension fund because of the nature of the self-employed business: cashflow will be tight at times,’ said Boulding.

‘If a self-employed person has a chance to expand their business…they may need to buy raw materials or take on another workers, and in recent years the self-employed have found it difficult to get money from the banks.

‘The lifetime ISA gives them the option to change course; they were going to use the money saved for retirement but they [have the opportunity] to raid it because the business needs cashflow.’

Paltry pensions

Last year the government commissioned Julie Deane, founder of The Cambridge Satchel Company, to review self-employment in the UK. The report, which was published in February, shows the number of self-employed has reached a record 4.6 million in the UK but less than a third pay into a pension.

Around 20% of self-employed people have no plans for retirement other than relying on the state pension, and alternative retirement plans include ‘relying on…selling their business…their partner’s income or pension and…income from property’.

‘With the growth in the numbers of self-employed, and the trend set to continue, the numbers of self-employed who are choosing not to save for retirement could be a concern in later life,’ said Deane.

The report said one of the reasons self-employed people did not save was because they did not feel they could afford to ‘because of the volatility of income associated with being self-employed’ and ‘accessibility to the pension fund to cover periods of not earning would be highly desirable’.  

Additionally, the report found, ‘many feel there is unfair treatment when compared to employees who benefit from an employer’s contribution to their pension and the tax benefits associated with this’.

Call for bigger bonus

While ease of accessibility has been addressed by the introduction of the lifetime ISA, Boulding said the government needed to go further to address the imbalance between the pension perks of employees and the self-employed.

Boulding said the lifetime ISA had ticked off many of the recommendations made by Tisa on how to help the self-employed, bar one. Tisa believes the government bonus paid to self-employed people should be 50% - double the amount given to employees.

‘We got a lot of what we wanted [with the introduction of the lifetime ISA] but we did feel that the self-employed need a bigger top up than 25% because the self-employed do not get employer [pension] contributions and do not get the benefits an employee gets,’ he said.

Boulding believes that differing rates for employed and self-employed people would not be discriminatory to those working in companies and pointed to the differing rates of national insurance contributions paid by employed and self-employed people.

‘We think the self-employed deserve a bigger top up and there may still be time [to introduce a higher rate],’ he said.

With the lack of savings among the self-employed, the incentive of a bigger government bonus would also stave off any type of compulsory saving for self-employed people.

Boulding said that making saving mandatory for self-employed workers, or even semi-mandatory as is the case with pension auto-enrolment, would be a mistake.

‘Compulsory pensions look and feel like tax and tax isn’t popular,’ he said. ‘What the government has done with the lifetime ISA is offer a voluntary solution and all the signs are suggesting it will be popular.’

3 comments so far. Why not have your say?

Alasdair MacDougall

Apr 05, 2016 at 15:37

You say that the maximum personal contribution is £128,000. At £4,000 a year, that would take 32 years. If you can only contribute from age 18 to 40, I'm not sure that adds up.

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Alasdair MacDougall

Apr 05, 2016 at 15:41

You say that a total of £128,000 can be contributed personally. £4,000 a year, from age 18 to 40, I'm not sure that adds up.

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Mickey

Feb 16, 2017 at 13:25

I think the article says that 18 to 40 is the age limit for starting one, you can add to it until you are 50 not 40.

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