Saving for retirement is a long-term game but there are some groups facing more challenges than others.
Data from the latest Hargreaves Lansdown Savings and Resilience Barometer shows that the self-employed, renters and single parents are particularly at risk as they battle higher costs, volatile working conditions and housing expenses.
Renters struggle because they are paying higher rent which leaves them with less money left over at the end of the month to get onto the housing ladder.
On average, they end the month with just £62. Being able to own your own home is a major plus point when it comes to boosting retirement resilience, as it reduces your later life costs and gives you a valuable asset. Trying to battle paying rent with saving into a pension can be a challenge too far for many renters.
REAL CHALLENGES
Single parents also face real challenges, as they have to cover all their living costs with one wage as well as paying out more for essentials like food. However, when you also add children into the equation then you can see why many single parent finances are stretched to breaking point even before they start saving into pensions. On average they have just £50 left at the end of the month.
It’s important not to give up though. Saving what you can into a pension will improve your position. If you are able to increase contributions every time you get a pay rise, for instance, then that can be a big help. However, you should be careful not to overextend yourself and risk building up debt, which could cause your problems further down the line.
VOLATILE EARNINGS
The self-employed have a different set of challenges to deal with. They are not covered by auto-enrolment and do not receive the all-important employer contribution. In addition, volatile earnings can mean that many are nervous about tying up their money into a pension, which they can’t access until at least 55.
However, the Lifetime ISA can play a vital part in helping this group build retirement savings. The 25% bonus on contributions up to £4,000 per year has the same effect as basic rate tax relief in a pension, with the added benefit that any income taken is tax free.
Money can also be accessed in tough times, subject to an exit charge. It’s an attractive alternative to a pension for self-employed people paying basic rate tax. Higher rate taxpayers would still be better off with a pension, given tax relief is given at your highest marginal rate.
EARLY ACCESS CHARGES
The charge on early access is a problem though, as it not only removes the effect of the bonus but also a chunk of people’s hard-earned savings. An example would be that someone contributing £4,000 to their LISA would get a 25% bonus, which tops them up to £5,000.
However, if they were to access that money early, the 25% exit charge would amount to £1,250. Reducing this charge to 20% would remove this effect and give savers the comfort of knowing they won’t lose any of their own money.
REFORM NEEDED
The second key reform is to widen the age at which people can open and pay into a LISA.
At the moment, you can only open a LISA if you are between the ages of 18 and 39. Allowing people to open and contribute to a LISA up until the age of 55 would enable more people to build up a decent retirement income – notably those who become self-employed later in life.
We estimate that these changes could be a huge help to the 1.2 million households that have a self-employed earner paying the basic rate of tax.
Helen Morrissey is Head of Retirement Analysis at Hargreaves Lansdown
