Aegon warns of pension shortfall when moving to self-employment

Employees who become self-employed could lose out on over £100,000 in retirement if they do not increase their contributions, Aegon has warned.

Its analysis showed that a 35-year-old becoming self-employed after 10 years of employment would lose out on £115,300 if they did not make up for their previous employer’s contributions.

An auto-enrolled worker receives a minimum contribution of 3 per cent of earnings from their employer on top of their 5 per cent personal contribution.

However, this boost is not received by self-employed and Aegon has warned that the self-employed will struggle to keep up with employee pension pots if they leave it too late to increase their contribution levels.

Its analysis found that an individual in traditional employment throughout their career will receive around £68,000 in employer contributions, while someone who was self-employed after the first 10 years of employment would receive and average of £8,100.

When reaching state pension age, this would leave the employee with around £411,000 for retirement and the self-employed with around £296,000.

Aegon pensions director, Steven Cameron, said that although auto-enrolment has been “a big step in the right direction”, the self-employed are not benefiting and “find themselves lagging behind”.

He continued: “As well as making pension saving the default, auto-enrolment has meant employees benefit from valuable employer contributions, which boosts their retirement savings.

“The self-employed miss out on this and the figures show a 25 year old employee on average earnings who decides to become self-employed after 10 years and keeps paying a pension contribution at the employee level of 5 per cent of earnings could miss out on around £115,300 by state pension age from not receiving employer contributions.

“Saving for retirement is often very difficult for the self-employed as many have highly variable earnings and often face foregoing income to invest in growing their business.

“However, where they can, individuals should look to not just maintain personal contributions at 5 per cent but increase them as soon as their employer contributions are lost.

“Leaving this until later on in life will make it considerably harder to catch up and bridge the gap with employees.”

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