The self-employment resilience gaps – and why they may not be as bad as they seem

Self-employed people are far less likely to have the insurance they need, and face worrying pension gaps. Only 22% are on track with their retirement savings, compared to 43% of employed people.

However, self-employed households are more likely to have enough cash savings – 78% compared to 74% among employed people, and on average they hold £15,182 – compared to £12,151 among employed households.

There’s also more likely to be some money left over when the bills are paid – 63% compared to 60% for employed people.

And some self-employed people have chosen to invest elsewhere for their retirement. Some 21% have invested assets – compared to 16% of employed people.

Figures from the first HL Savings and Resilience Barometer, produced with Oxford Economics, in January 2022.

Sarah Coles, senior personal finance analyst. Hargreaves Lansdown said: “Alarming pension gaps for self-employed people are the stuff of nightmares, with four in five people failing to put enough money into a pension, and risking huge shortfalls in retirement. However, when you look at overall financial resilience, things aren’t as bad as they seem, and self-employed people have some huge strengths too.

Overall, self-employed people are less financially resilient than their employed counterparts, One major weakness is when it comes to preparing for the unexpected. They won’t have sick pay, income protection or life insurance through the workplace, and many of them haven’t closed the gap. There is a significant difference between the proportion of self-employed people who have enough protection in place (33%) and the total population (42%).

There’s also a particularly alarming self-employed pension gap. The fact that self-employed people don’t benefit from automatic enrolment into a workplace scheme, and will never get an employer top-up, means self-employed people need to work much harder to save for retirement. Unfortunately, there’s every sign it’s not a priority. Figures from the Family Resources Survey for 2020/21 found that only 19% of self-employed people were paying into a pension, compared to 80% of employed people.

In some cases, they may have chosen to save into a Lifetime ISA instead. Basic rate taxpayers, who expect to pay basic rate tax in retirement, and who are aged 18-39, may be better paying the first £4,000 a year of retirement savings into a LISA. It effectively gets the same tax relief as a pension on the way in for this tax bracket, but income is tax free on the way out. For employed people the employer contribution means it’s usually a better first port of call, but without this to benefit from, self-employed people may prefer to start with the LISA.

For those who haven’t saved into a pension or a LISA, there’s a risk they won’t have anything else to fall back on, so this could mean hundreds of thousands of self-employed people are set for a far less comfortable retirement than they may be expecting.

In some cases, however, self employed people have chosen to prepare for retirement another way. They’re slightly more likely to invest in the stock market, but much more likely to invest in property: 19% own a second property compared to 12% of employed people. Of those with property wealth, the self-employed have £84,550 invested on average compared to £50,000 for their employed counterparts. This is likely to owe much to the fact that one in six self-employed people work in building construction or specialist construction services. The idea of buying a second home and doing it up for rental or sale is much more appealing when you have the skills to do the work yourself.

Self-employed people have also had to tailor their lifestyle to fit a possibly fluctuating income, so many of them have money left over at the end of the month. Among the middle fifth of earners, the average employee has £198 in surplus income, and the average self-employed person £477. However, it’s important to bear in mind that self-employed people may well make their income before tax, and only pay it twice a year.

These strengths don’t make up for the fact self-employed people have lower resilience in general. And it’s important to view your finances as a whole, to be sure you haven’t let any gaps open up while you were busy running a business. However, for anyone alarmed by the self-employment pension gap, the context offers a little reassurance.”