Empowering the Freelance Economy

New report suggests only 1 in 5 self-employed headed for a comfortable retirement

Future generations unlikely to have as comfortable retirement as current pensions says report/ Photo by cottonbro studio via Pexels
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The Office for Budget Responsibility projects the UK’s state pension and pensioner benefit spending will rise from 5.6% to 9.6% of national income by the early 2070s; this increase is equivalent to £100 billion a year in today’s terms. The pressures facing the public finances due to health spending are even larger, according to a report by the Institute of Fiscal Studies (IFS).

How prepared are Britain’s self-employed for a comfortable retirement?

The IFS report said that 24% of adults are currently over the state pension age. This is projected to rise to 27% by 2050 and 30% by 2070. This puts substantial pressure on public finances.

1 in 5 self-employed headed for a comfortable retirement

Fewer than one in five of the growing number of self-employed workers are saving in a pension. This compares with around a third when the Pensions Commission reported. This is particularly concerning given that the decline in pension membership among the self-employed is greatest among those who have been self-employed for a long period, said the IFS report.

Are freelancers exposed to poverty in retirement if they are renting?

The IFS report said that increasing numbers approaching retirement live in more expensive, insecure, private rented accommodation. At age 65, only 3–4% of those born in the 1930s and 1940s lived in private rented housing, compared with 6% for those born in the 1950s and what looks likely to be 10% for those born in the 1960s.

“Unless a wave of inheritances leads to rising homeownership, this percentage could be even higher for younger generations, leading to a combination of a disappointingly low standard of living in retirement and/or greater reliance on housing benefit,” said the IFS.

  • Only 19% of renters are on track for a moderate retirement compared to 54% of those paying a mortgage.
  • Renters are at a disadvantage across all age groups. Only 26% of Generation Z renters are on track for a moderate retirement compared to 53% of those paying a mortgage.
  • For Generation X this drops to just 17% of renters and 59% of people paying a mortgage.
  • By not getting on the housing ladder people also risk having to pay rent in retirement which pushes up how much they need to save even more.
  • Moderate retirement is as defined by the Pension and Lifetime Savings Association’s Retirement Income Standards.

Source: HL Savings and Resilience Barometer

“Renters have a pension problem and lag way behind those paying a mortgage when it comes to pension planning,” said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. “It remains the case regardless of generation – only just over a quarter of Generation Z households who rent are on track for a moderate retirement compared to well over half of those with a mortgage. The picture gets grimmer as you get older with just under 17% of Generation X households who rent on track with their retirement planning,” she said.

Morrissey highlighted that soaring house prices mean people are getting on the housing ladder later, and in many cases not at all.

“Those able to get mortgages often get them at much longer terms than the standard 25 years and these trends have long-term impacts across financial planning,” said Morrissey.

She added, “This means people are increasingly going into retirement without having paid off their mortgage or facing the prospect of having to rent for the rest of their lives. These housing costs can add thousands of pounds to someone’s annual budget and mean they have to save far more for retirement than those who have been able to repay their mortgage.

“Younger generations -such as Generation Z and Millennials still have time to catch up with their retirement planning but those getting closer to retirement may find they need to make tough choices around working for longer to get back on track.”

Freelancers should increase skills to secure a better retirement

“The higher state pension ages rise, the harder it will be for people to remain in paid work until that age,” said the IFS report.

The report suggested that statistics have revealed that among those with low levels of formal education, 43% of men and 46% of women in their late 60s are disabled.

“A higher state pension age pushes up income poverty rates of those in their 60s: the latest increase, from 65 to 66, led to the income poverty rate of 65-year-olds more than doubling,” said the report.

“Despite the number of self-employed people growing considerably, many fewer of them are saving in a pension. Most private sector workers are left having to manage considerable risks – not least over how long their retirement will be – which for many will be incredibly difficult to balance well,” said Paul Johnson, Director of IFS.

“And an increasing number are likely to spend their retirement in relatively expensive, and less secure, private rented accommodation which will have adverse consequences for both retirement living standards and the government’s housing benefit bill. A fresh look at the UK retirement saving environment is long overdue,” he said.

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