Self-employment and
your finances

Published: 5 September 2019

The rise of self-employment has been a prominent theme in the workforce in recent years, with millions of people working for themselves.

The biggest increase has come in older age groups. Almost half of the UK’s self-employed population is now accounted for by the over-50s, according to jobs and volunteering service Rest Less1.

Of the 4.85 million self-employed people that make up almost 15% of the UK labour force2, 2.27 million are over 50, up from 1.45 million a decade ago. Rest Less also found that just short of a fifth of those are over 60, a rise of almost two thirds since 2009.

Why are so many choosing self-employment?

Advances in communications technology have allowed a growing number of jobs to be carried out remotely, making it easier to exchange company employment for going it alone.

For some people it’s likely to be a lifestyle choice. The freedom, flexibility and autonomy that self-employment can offer will be a big appeal for many. There’s also the potential in some industries to increase earnings by striking out on your own.

For others a move to self-employment may be borne more of necessity, perhaps driven by factors such as redundancy and the financial challenge posed by increasing life expectancy.

Why the rise in over-50s?

For those in their 50s and 60s, another factor may be the changing shape of retirement.

Research published earlier this year by the Institute for Fiscal Studies found a marked increase in the employment rate of 60-year olds from 45% to 58% since 2009. While much of this is a direct result of increases in the state pension age, there are other reasons too3.

Alongside increasing life expectancy, the pension freedoms that took effect in 2015, creating greater flexibility around retirement investing, have made it easier for people to extend their working lives in order to bolster their pension savings.

There’s no reason to suggest that the trend is likely to reverse any time soon. But becoming self-employed is clearly not a step to take lightly, especially if you’re currently an employee. It’s not a lifestyle choice that suits everyone, while the financial aspects can hold some challenges.

What does self-employment mean for your finances?

Here are three key areas in which different thinking may be required.

Taking steps to protect yourself

If you’re leaving employment to work for yourself, you may be giving up a range of employee benefits. It may also mean having to get used to the uncertainty that comes with an unpredictable cashflow.

Insurance such as life cover (replacing any cover lost through leaving employment), income protection – to cover crucial payments (such as mortgage or rent) in the event of being unable to work due to illness or accident - and critical illness insurance are among those you might want to look into.

Setting aside a rainy-day cash fund equivalent to – say – three to six months of expenditure may also give you additional peace of mind.

Looking ahead to retirement

Government figures show that just 14% of self-employed workers are paying into a pension4, with those leaving the workforce to become self-employed often giving up membership of a company pension scheme.

The tax relief currently available on pensions (which could of course change in future) makes them an obvious first port of call when it comes to long-term savings. Therefore you might want to look at the options for setting up new pension provision for your self-employment, such as stakeholder pensions, personal pensions and Self Invested Personal Pensions.

It’s not usually possible to take money out of a pension before you 55. So if the option to access long-term savings before then is important to you, you may also want to consider saving and/or investing through an ISA if you don’t already have one.

Whichever long-term savings vehicle you consider, if you’re giving up a company pension scheme to become self-employed you might want to think about increasing your contributions to compensate for the employer contributions you’ll no longer be getting.

Being proactive with your investments

A shift to self-employment may affect both your appetite and your capacity for taking investment risks. So, if you already have an investment portfolio through a pension, ISA or other investment account, you may want to be proactive about making sure it still reflects your risk profile and objectives.

Depending on how confident you are and how much you currently have invested you may find it worth taking professional financial advice when it comes to reviewing your Portfolio. But, if you’d rather do it yourself, you can take advantage of the information and resources available through online investment services, such as Alliance Trust Savings and interactive investor.

You could also consider whether consolidating any existing pensions, ISAs and investments you have would make a positive difference for you. Managing and reviewing your various plans can be much easier when they’re all in one place. This can be especially relevant to those in or nearing retirement and making sure their retirement finances are built to last.

Important information

This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.

Please be aware that the value of investments can fall as well as rise so you could get back less than you invest. Past performance is not a guide to future performance.

1 – Half of self-employed workforce now over 50 – 29 July 2019.
2 ONS – UK labour market: January 2019 – 22 Jan 2019 – see fig.4.
3 Institute for Fiscal Studies – Retiring at 65 no more? The increase in the state pension age to 66 for men and women – 5 March 2019.
4 FT – The self-employed pensions time-bomb – 18 Dec 2019.

Learn more

These are just some of the key areas you might want to think about as you embark on self-employed life. There are other issues to take into consideration too, from tax and banking to cashflow management and succession planning. To learn more about self-employment and your finances, download our free guide.

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