The pension gap for the self-employed

The ranks of the self-employed have swelled over the past two decades, rising from 3.4 million (12.9% of the workforce) in 1998 to 4.8 million (15.1%) in 2017. Yet over the same period, the proportion of self-employed workers paying into a private pension has fallen from 48% to just 16%, according to the Institute for Fiscal Studies.

When you compare this to the impact of auto-enrolment on employed workers when it was introduced in 2012; there is a stark difference. Millions of people entered into the pensions system and this led to record numbers of people paying into one by June 2020.

A widening gap 

That means the UK now faces a widening pensions gap, with the self-employed falling behind when it comes to saving for retirement. There are several reasons for this, including their exclusion from auto-enrolment and the income insecurity that can be a feature of self-employment. 

There’s also the hassle factor. There’s a lot to think about when you’re self-employed, and starting and paying into a pension can quickly slide down the list of priorities. Similarly, self-employed earnings can be uneven and unpredictable, so it might be difficult to work out exactly how much to contribute each month and year. 

You can put blood, sweat and tears into getting your business off the ground, and it can be chaotic. So, it’s often hard to find the time to focus on the bigger picture when it comes to retirement finances. 

Reducing risk in investing 

Many self-employed people also expect their business to be their main source of retirement income. Whilst this is understandable, a business should form part of a broader financial plan and relying on it entirely is risky. 

Having your income and future retirement dependent upon the performance of one company can leave you exposed to societal changes, global crises and, very often, a lack of geographical, industrial and asset class diversification. If the business performance suffers, so does your present and future income. 

Ideally, any retirement plan should include a mix of pensions, ISAs, property, state pension, earnings and so on. If you’re self-employed, your business is part of that. Having other assets to call on can benefit your business planning as well, particularly if you’re approaching retirement and finding it hard to extract value from the business. 

When you come to retire or take value from your business you may have difficulties selling or passing the business on. That’s where plans can come unstuck if you’re not diversified. Keeping a mix of other assets gives you a safety net, more time and more flexibility. 

Don’t miss tax advantages 

Diversifying also brings tax benefits. For example, when you take money out of a business, there will likely be some degree of Inheritance Tax (IHT) or Capital Gains Tax (CGT) liability. By contrast, pensions stay outside your estate for IHT purposes, which makes them more tax efficient than a business when it comes to passing on wealth to your family. 

The 2015 pension freedoms increased the scope of pension death benefits and have made them an effective IHT planning tool. A personal pension is generally free from IHT and can be passed to a dependent or nominated beneficiary, subject to scheme rules, in a very tax-efficient manner. 

The tax advantages of pensions can help you when it comes to maximising your contributions too, especially when you know your earnings can vary significantly from year-to-year. 

While there is an annual allowance that limits how much you can pay into a pension each year, there is flexibility within that. This is due to carry-forward rules, which entitle you to use any unused allowance from the previous three tax years to maximise your pension contributions in the current tax year. 

This means you can contribute to your pension beyond the current tax year’s allowance. It’s a way for you to catch up, and it removes some of the worry around being able to fund your pension as fully as possible. 

Protecting future finances 

When you’ve got a business to run, managing your longer-term finances can feel time-consuming. That’s why it might make financial and business sense to have accountants and financial advisers as part of your support network. 

Some important things to consider include structuring your pension contributions in such a way that you don’t miss out. Also make sure that the running of your business dovetails with your wider financial plans. 

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. 

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances. 

Startup Details

Startup Details


St. James's Place Wealth Management


St. James’s Place Wealth Management is a FTSE 100 company with £129.3bn of client funds under management.


The company’s success has grown through the ethos of offering quality, face-to-face wealth management advice and commitment to building trusted and enduring relationships with its clients. The St. James’s Place proposition is further enhanced by its distinctive approach to investment management.

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    Cirencester, Gloucestershire, UK
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