Thousands of self-employed workers could find themselves facing a pension shortfall of as much as £220,000 because they aren’t paying enough into their pot and don’t benefit from employer contributions, according to latest findings.

If you’re self-employed, you’ll need to set up and pay into your own personal pension if you want to save for your retirement and benefit from tax relief on your contributions. You can read more about personal or private pensions in our guide Pensions for the self-employed. However, pension provision often isn’t a priority for the self-employed, particularly when everyday costs are soaring.

According to a report by the Institute for Fiscal Studies (IFS), people who work for themselves don’t usually increase their pension contributions over time, which leads to a substantial shortfall at retirement. They also don’t receive any employer contributions, which make a substantial difference to retirement pots.

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How much should self-employed workers be saving?

Around half of self-employed people that do pay into a pension maintain their contributions at the same level for two years in a row, according to the IFS. One in five self-employed workers who have been saving into a pension for at least nine years have never increased their contributions, despite inflation, or the cost of living soaring.

On the other hand, employees are automatically enrolled into their workplace pension scheme under the government’s auto-enrolment scheme, unless they actively opt out. The amount that employees typically pay into their pension rises over time, as it consists of a percentage of their earnings.

If you’ve been auto-enrolled into your employer’s workplace pension scheme, the minimum contribution is 8% of ‘qualifying earnings’. Of that 8%, your employer can’t contribute less than 3%, but they can pay as much of the 8% as they want. Read more about how workplace pension schemes work in our guide How does pension auto-enrolment work?

The most common amount that self-employed workers pay into their pension pots each year is just £50 a month, or £600 over a year, the IFS found. Combined with self-employed workers often failing to increase their pension contributions over the years, this means that thousands will fail to build a big enough pension pot to cover a moderate standard of living in retirement.

According to the Pensions and Lifetime Savings Association’s latest Retirement LIving Standards research, to have a ‘moderate’ living standard in retirement, you’d need an income of about £34,000 before tax if you’re a couple, or £23,300 if you’re single. If you received the full State Pension of £9,627 a year as a single person, for example, you’d need to produce an additional income from your savings of about £13,673. A ‘moderate’ lifestyle, according to the PLSA, provides enough money for one foreign holiday a year and eating out a few times a month. Read more in our guide Can you afford to retire?

Even if a self-employed worker saves more than the typical amount per year, their pot is still likely to fall short. For example, let’s say they start saving £1,000 a year from age 35 into a personal pension, and increase this by 2% a year. If they pay contributions until they reach the age of 68, their fund in today’s money would be about £48,800. If they start five years earlier at age 30, it would be around £59,800. That’s still around £221,200 short of the fund needed to achieve the PLSA ‘moderate’ retirement income (from an annuity), allowing for a full State Pension, according to calculations by Aegon.

Steven Cameron, pensions director at Aegon, said: ”Millions of employees have benefitted from being automatically enrolled into a workplace pension with a valuable employer contribution. But in sharp contrast, the self-employed have not benefited from this and have been left to their own devices.

“It’s very worrying that many are falling far behind in their retirement planning. Even those who do initiate their own pension savings are often saving far less than is needed for anything close to a comfortable retirement.”

Heidi Karjalainen, a research economist at IFS and author of the report, said: “The very low level of private pension participation among the self-employed has, rightly, led to a huge amount of policy concern from the government.

“But with so many self-employed savers’ pension contributions not rising in line with either inflation or earnings, it is clear that solving the problem of participation alone is not enough to ensure the adequacy of future pension incomes for self-employed workers.”

The IFS report also shows that self-employed workers who earn between £10,000 and £20,000 pay a similar amount into their pension compared with employees in workplace pension schemes. However, it’s the self-employed who earn around £45,000 a year who contribute less than their peers, at around 7% of their income, compared to 11% for employees.

You can use the Rest Less pension calculator to see a forecast of the pension income you’re likely to get when you retire, based on the current value of your retirement savings. This can include your State Pension entitlement if you want it to, and you can also see the impact of taking 25% of your pension as tax-free cash. You can amend your retirement age and the level of income you want as well, to see how these affect the length of time your pension will last.

The Hargreaves Lansdown Savings and Resilience Barometer found that only around 25% of self-employed households were on track for a moderate retirement (as defined by the PLSA above), compared to 42% of households overall.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “This could be because self-employed people find pensions inflexible and they’re unwilling to lock money up until the age of 55 in case their income drops. Government data shows self employed people are more likely to invest in assets such as property instead.”

Where to go for more help

While pensions can seem complicated, it’s important to get started with saving for retirement sooner rather than later. The most important thing is to not put off thinking about your pension, and remember it’s never too late to start saving. You can still benefit from pensions tax relief until the age of 75. Read more in our guide How pension tax relief works.

If you’re not sure whether you’re contributing enough, or whether your pension savings are working as hard as they possibly can for you you may want to consider seeking professional financial advice. An advisor can help you ensure that you’re maximising your retirement savings, and provide specific recommendations based on your individual circumstances.

If you are looking for pension advice from a financial advisor, word of mouth is always helpful. Many advisors focus on building their reputation locally, so in the first instance it’s worth asking trusted friends and family who they have chosen to advise them on their money and if they would recommend using them.

If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.