In an economy where the self-employed are an integral part, their financial security in retirement remains a critical concern. A recent report from the Hargreaves Lansdown (HL) Savings and Resilience Barometer reveals a stark reality: only 22% of self-employed households are on track to achieve a moderate retirement income. This alarming statistic underscores the need for reforms to help freelancers and small business owners secure their financial futures.
The Current Challenge
The self-employed face unique challenges that hinder their retirement savings. Unlike employees, they are not included in auto-enrolment pension schemes, which automatically set aside a portion of earnings for retirement. Additionally, the unpredictable nature of self-employment income makes many hesitant to lock away funds in traditional pensions. This financial vulnerability calls for a more flexible and appealing saving option.
The Lifetime ISA: A Potential Solution
One promising avenue is the reform of the Lifetime ISA (LISA) scheme. Currently, the LISA offers a 25% government bonus on contributions up to £4,000 annually, mirroring the basic rate tax relief available on pensions. Moreover, the income withdrawn from a LISA can be taken tax-free, providing a significant incentive for saving.
However, the LISA’s current structure includes a 25% exit penalty for early withdrawals, which not only recoups the government bonus but also penalises the saver’s contributions. This punitive measure can deter self-employed individuals from utilizing the LISA, especially when faced with income volatility and unexpected financial needs.
“Reform to the Lifetime ISA regime could be a game changer for [the self-employed]. The 25% government bonus on contributions up to £4,000 per year works in a similar way to basic rate tax relief on a pension, and income can be taken tax-free,” says Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown.
Proposed Reforms
The HL Savings and Resilience Barometer report advocates for two key reforms to make the LISA more attractive and beneficial for the self-employed:
- Reduce the Exit Penalty: Lowering the exit penalty from 25% to 20% would lessen the financial hit on savers needing early access to their funds. This change would ensure that savers retain more of their hard-earned money while still returning the government bonus.
- Extend the Age Limit: Increasing the upper age limit for opening a LISA from 40 to 55 would accommodate those who embark on self-employment later in life. This extension would provide a wider window for older self-employed individuals to start building their retirement savings.
The Potential Impact
These proposed reforms have the potential to significantly enhance retirement savings for the self-employed. According to the report, over 1.2 million households with a basic rate tax-paying self-employed earner could benefit from these changes. By making the LISA more accessible and less punitive, freelancers and small business owners would have a more flexible and appealing option to secure their retirement.
Path to financial security
For freelancers and small business owners, the path to a financially secure retirement is fraught with challenges. However, with strategic reforms to the Lifetime ISA, there is hope for a brighter financial future. By reducing the exit penalty and extending the age limit, the government can provide the self-employed with a more effective tool for retirement savings, ensuring they are not left behind in their golden years.
Do you agree that the upper age limit of the Lifetime ISA should be increased to 55? We welcome your insights and thoughts.
