When it comes to retirement the self employed unfortunately start from the rear. The difference between the self employed and employees is that employees are entitled to build up the extra pension known as SERPS (State Earnings Related Pension Scheme) and now S2P (State Second Pension). This is not possible for the self employed.
Part of the National Insurance paid by employees (above a certain level) is put towards this extra State pension and it is taken directly from pay, along with tax and the rest of the National Insurance contributions.
The self employed have to pay their own National Insurance with additional amounts depending on profits. However, none of this goes towards building up the extra pension. Also, being self employed means no company pension scheme either, leaving all retirement provision to personal choice.
The self employed need to be more aware of what their pensions will produce in retirement and how to make up any shortfalls early. This difference in State benefits has been the case for a long time but with fall in stock markets and returns, the problems faced are greater.
A recent survey from JP Morgan Fleming suggested that the majority of self employed people will retire on around 40% of their salary before retirement.
Our View
This is something that we have lobbied the self employed and smaller business groups with for sometime. It has even been on our web sites since launch. Take at look at our idea for the Self Employed and National Insurance.
Learn more about pensions in the Pensions Adviser.com.