New Research Shows Self-Employed Workers Could Face Significant Retirement Income Shortfall
According to recent findings from Funding Circle, the UK’s leading business finance platform, the average pension pot for a self-employed worker is estimated to be just £50,700 at retirement. This is only about 15% of the pension pot of employees. With current saving rates, this could leave self-employed individuals with a potential retirement income shortfall of £208,500, making them heavily reliant on the State Pension.
Private Pensions Are Necessary, but Self-Employed Individuals are Falling Behind
In light of uncertainty surrounding the future of the State Pension, private pensions have become increasingly important. While employees benefit from automatic enrollment and regular contributions from both themselves and their employers, only one in five self-employed workers contribute to a private pension. This is due to rising business costs, irregular income, and inflation, which often force self-employed individuals to prioritize their immediate financial needs over long-term savings.
Data Reveals the Disparity
Although self-employed individuals contributed £2.7 billion to private pensions in 2023-24, up from £2.3 billion the previous year, participation rates remain low. According to the Institute for Fiscal Studies (IFS), 63% of self-employed workers are projected to fall short of their target replacement rate – the level needed to maintain living standards in retirement. Furthermore, the IFS reports that only 20% of the self-employed currently save into a private pension, and among those who do, over a quarter make unchanged contributions for five years, resulting in their savings effectively shrinking in real terms. Additionally, 66% of self-employed individuals are not expected to meet the Pensions and Lifetime Savings Association (PLSA) minimum standard of £13,400 a year for a single pensioner outside of London.
Why Self-Employed Workers Save Less
While only 20% of self-employed individuals are currently saving into a private pension scheme, there are several reasons why they may not be investing in this way.
No Automatic Enrollment Unlike employees who are automatically enrolled in workplace pensions, self-employed individuals must set up their own private pension. This lack of automation requires individuals to research and choose a pension provider, which can be intimidating without the guidance of an HR department or employer scheme.
Irregular Income Variable earnings make it challenging to commit to regular pension payments. In many cases, self-employed income can fluctuate monthly or seasonally, making consistent contributions difficult. During tighter months, contributions are often paused or reduced.
Cash Flow Pressures Many self-employed workers prioritize business costs, taxes, and daily expenses over long-term savings. Since the benefits of a pension are years away, the incentive to contribute may feel less urgent.
Alternative Retirement Expectations Some self-employed individuals believe they can rely on selling a business, property, or other investments instead of a pension. This can reduce their motivation to contribute regularly.
Tax Trade-Offs Although pension contributions are tax-deductible, many choose to reduce taxable profits through immediate business expenses rather than deferred savings.
Psychological Barriers Contributing to a pension often feels like “invisible” money that cannot be accessed until retirement. For individuals managing their own finances daily, this lack of immediate reward can make pension contributions seem less appealing than saving in accessible accounts.
The Retirement Deficit
At current saving rates, self-employed workers could potentially retire with £10,000-£11,000 less per year than their target income, even with the full State Pension. In contrast, employees, who are supported by automatic enrollment and employer contributions, are much more likely to achieve their retirement goals.
Assuming a typical 40-year working life (from age 25 to 65), employees benefit from automatic enrollment, with around 88% participating and contributing an average of £3,000 per year. On the other hand, participation rates for the self-employed drop to just 20%, with average annual contributions of £2,100. If a 5% annual investment growth rate is applied over a 40-year career, the results are as follows:
Employees: a pension pot of approximately £318,000, providing around £12,720 per year in retirement income.
Self-employed: a much smaller pot of around £50,700, yielding only £2,028 per year.
When the full State Pension (projected at £12,547 per year from 2026) is factored in, the total annual retirement income would be:
Employees: approximately £25,267
Self-employed: only £14,575
This creates a £10,425 annual gap, which amounts to a potential shortfall of £208,500 over a 20-year retirement. This significant deficit could be the difference between financial comfort and financial strain in later years.
The widening gap is driven by two main factors:
Low participation: only 20% of the self-employed currently contribute to a private pension, compared to 88% of employees.
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