How LISA reform could help solve the self-employed pensions and savings gap
Changing the parameters of the Lifetime ISA could help more households, especially those among the self-employed, become much better off come retirement, says a personal finance expert
Although self-employed people paid £2.3 billion into pensions in 2021/22 (up from £2 billion a year earlier), only 340,000 self-employed people paid into a personal pension. This is up from 330,000 a year earlier but is a drop in the ocean given that more than 4 million people are self-employed.
Sarah Coles, a personal finance expert at Hargreaves Lansdowne, is of the opinion this demonstrates the size of the pensions gap among self-employed people.
According to the HL Savings & Resilience Barometer results in September, self-employed people find it difficult to tie money up in a pension, which is why the Lifetime Individual Savings Account (LISA) could be a particularly useful retirement savings option – particularly for basic rate taxpayers.
“However,” sales Coles, “for it to be truly suited to the task we’re calling on the government to allow people to open LISAs and receive bonuses on LISA contributions until the age of 55. We would also like to see the penalty on unauthorised withdrawals reduced to 20% for self-employed people.”
Expanding access to the LISA for households aged between 40 and 55 could include an extra 680,000 households with a self-employed worker who pays the basic rate of tax. Further, the reduction of the penalty could benefit 540,000 households under 40 with a self-employed worker who pays the basic rate of tax.
“Clearly, the self-employment pension gap needs to be closed, and LISA reform offers an effective approach to help do this,” says Coles.
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What is a Lifetime ISA?
You can use a Lifetime ISA (Individual Savings Account) to buy your first home or save for later life. You must be 18 or over but under 40 to open a Lifetime ISA. As it stands, you can put in up to £4,000 each year, until you’re 50. You must make your first payment into your ISA before you’re 40. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. This is £20,000 for the 2023 to 2024 tax year. You can hold cash or stocks and shares in your Lifetime ISA, or have a combination of both.
Compare LISAs here (scroll towards the end of the MSE article).
Start thinking about financial resilience now
Coles is of the opinion that anyone who already works for themselves should consider their financial resilience as soon as possible.
She says, “Around two-thirds already have enough emergency savings, but if you don’t have cash to cover 3-6 months’ worth of essential expenses in an easy access savings account, building those savings should be a priority.”
She suggests the self-employed also need to think about protecting their family if they were to be unable to work for a while or pass away. This tends to mean insurance coverage like life insurance and income protection.
These are areas people should consider sooner rather than later in their freelance career. The reason being you do not have the cushion of employee benefits to fall back on.
The HL Savings and Resilience Barometer, for example, found that while 71% of employees would get a pay-off if they were laid off, only 12% of self-employed people would.
Meanwhile, 95% of employees would be paid if they were too sick to work, while only 33% of self-employed people have this protection. This is in addition to the well-documented pension shortfall, which means only 24% of self-employed households overall are on track for a moderate retirement income – compared to 46% of employed households.
“While it’s always difficult to think about the long-term when you’re working so hard on the short-term, pension savings need consideration too,” says Coles. “It’s harder to commit to regular large pension contributions when your income varies, so you can start smaller. At the end of the tax year you can then consider making a lump sum payment, and increasing monthly payments for the coming year,” she says.