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Navigating pension options for gig economy workers

Author: ICAEW Insights

Published: 19 Jul 2023

Industry experts unravel the common challenges and potential for gig workers in pension planning. The first question is, how much should you save?

The gig economy has been growing steadily in the UK, bringing flexible work arrangements to millions of individuals. However, with this newfound flexibility comes the responsibility of planning for a secure financial future, including retirement.

Workers in the gig economy often face unique challenges when it comes to pension planning. Unlike traditional employees, they typically lack access to employer-sponsored pension schemes, making it crucial for them to take proactive steps to secure their retirement.

Nicholas Hamilton, Director and Chartered Financial Planner at Mazars, says there are several options available to gig economy workers when it comes to setting up a pension. They include a personal pension (for example, a self-invested personal pension), an individual personal pension or stakeholder plan (a personal pension with tighter regulations, particularly regarding the charges levied), or they could join the government’s own scheme, National Employment Savings Trust (NEST).

“The benefit in being self-employed means that if the individual changes jobs or works a number of different contracts with different pension providers, contributions can still be made to the same pension plan, making it easier to administer and manage the capital,” Hamilton explains. “By comparison, an employed individual who changes employer every few years could be left with several workplace pension schemes that they’ll have to monitor or else actively decide to consolidate.”

How much should gig workers’ pay into their pension?

There are restrictions on the amounts that can be paid into a pension in any one tax year. “First, for the individual to receive tax-relief on the contribution, this should be no more than their gross taxable income for the year, known as relevant earnings,” Hamilton says.

Pension contributions must also not exceed the annual allowance of £60,000 in 2023/24. However, there is scope to contribute above this limit if an individual’s earnings allow and they haven’t made use of their annual allowance in the previous three tax years, when the limit stood at £40,000.

Pension contributions will be dependent on the individuals’ saving capacity and their wider financial circumstances that will dictate their reliance on any pension savings in retirement.

Hamilton explains: “Part of the consideration when it comes to saving into a pension is that while there is significant benefit in the upfront income tax relief provided and the ability to withdraw 25% of the pot tax-free in retirement, funds held in a pension cannot be accessed until the individual reaches minimum pension age. This is currently 55, but increasing to 57 from 6 April 2028.”

As a result, Hamilton believes it’s important that other savings are set aside for shorter term commitments and as a contingency for any emergency expenses that may occur, particularly if there is uncertainty and variability in the earnings profile of the individual, as can often be the case for gig economy workers.

As a rule of thumb, ‘save half your age’ is the percentage of pre-tax income that should be saved into a pension. For example, at 50 workers should aim to save 25% of their pre-tax income in a pension.

Hamilton says: “This reflects the fact that saving into a pension earlier is better than leaving it to later in life, as the funds have more time to grow through investment returns with the benefit of compounding adding to the pot.”

The role of accountants and advisors

As trusted advisers, chartered accountants have an important role to play in helping their clients understand the importance of regular retirement saving and the tax advantages of pensions. ICAEW’s Head of Personal Financial Planning, John Gaskell, says: “A significant part of this can be done at the generic level, with the accountant helping clients by putting together a personal financial plan that’s aligned to meeting their medium and longer-term goals.

“However, to deliver the all-important integrated planning, accountants need a network of FCA-regulated financial advisers so they can identify a financial adviser that wants to look after clients earning a living in gig-economy. This collaborative model can offer a win-win solution to all involved.”

Pensions and Personal Finance

Amid an ever-changing economic landscape, pensions and personal finance are facing new risks, demands and opportunities. We take a closer look at these shifts and how those in the profession can respond.


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