Good Businessman, Bad Pension Plan?

Self-employed workers should be worried, because most are saving far too little for retirement.

Too few self-employed workers are saving enough for retirement, according to a study from life, pensions and investment firm Scottish Widows.

Around a tenth of adults -- over 4.4 million people -- are self-employed. Of these, around 2.55 million are aged over fifty, so almost three-fifths of self-employed individuals (58%) fall into in this age group. However, Scottish Widows warns that many of the self employed are 'more [Albert] Steptoe than [Sir] Stelios [Haji-Ioannou]' because they are set to lose out in retirement!

Despite being around the corner from retirement, just over a third (36%) of these older workers (Scottish Widows dubs them 'grantrepreneurs') is saving adequately for retirement. Even more worry is the fact that three in eight (38%) aren't saving anything at all for their life after work.

Although self-employed workers can pay extra National Insurance contributions to build up a basic state pension, they have no access to the State Second Pension (S2P), nor do they have an employer to boost their contributions. Furthermore, self-employed workers will not be automatically enrolled into the National Pensions Saving Scheme (NPSS) in 2012, which the government plans to introduce in 2012.

Hence, the self-employed workforce is particularly vulnerable to under-saving for retirement, as the following table shows:

*Employment status*	*Saving adequately (%)*	*Not saving at all (%)*
Self-employed	36	38
Employed (private sector)	40	28
Employed (charity/voluntary)	49	33
Employed (nationalised industry)	56	20
Employed (other public sector)	59	22

Overall, Scottish Widows estimates that under half (46%) of the workforce is saving enough for retirement. However, self-employed workers appear to be saving less than any other sector, which is a matter for some concern. Indeed, public-sector workers are streets ahead when it comes to retirement planning, with close to three in five (59%) saving adequately for their old age.

Another problem which the self employed face is higher levels of personal debt, as this table reveals:

*Employment status*	*Mortgage debt (£)*	*Other debt (£)*	*Save regularly (%)*
Self employed	147,000	9,600	23
Employed	141,600	7,200	32

As you can see, a typical self-employed person has around £5,400 more mortgage debt, plus £2,400 more non-mortgage debt, which partly explains why fewer self-employed workers save regularly. This also explains why almost a quarter (23%) of the self employed believe that they will not be able to retire before reaching seventy, compared to just a sixth (16%) of employed workers.

As the majority of self-employed workers can't rely on the state or an employer to support them in retirement, it is vital that they take steps to save for retirement. Speaking as someone who runs a small business, I've discovered that the joys of a flexible lifestyle and working patterns are offset by the uncertainty of having a highly irregular income!

Then again, saving for retirement need not necessarily mean contributing to a personal or stakeholder pension plan. Do explore the alternatives, such as saving in a tax-free Individual Savings Account (ISA), buy-to-let property investing, or even saving in cash if you're close to calling work a day.

Ultimately, the choice is yours. Then again, whatever you do, don't simply ignore the issue of retirement, because the longer that you wait, the harder the decisions become...

More: Learn more in the Fool's Retirement and Pensions centre.

Cliff owns shares in Lloyds TSB, owner of Scottish Widows.