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Self left on the shelf

Pensions have been a hot topic in the financial media over recent months,

with stakeholder being the big issue that will affect everyone. But will

it? One aspect of the potential market for stakeholder that has been

conspicuous by its almost total absence from debate is the self-employed.

Questions that do not seem to have been answered include, how will

self-employed people be affected? Has the Government thought through the

issues for this significant sector of the UK market?

In the original Government document, Partnership in Pensions, much was

made of the fact that self-employed people would be an important target for

stakeholder. There was discussion about the merits of extending Serps or

the state second pension (S2P) to include them and it was envisaged that

affinity groups would offer stakeholder schemes for the self-employed.

As we move on, we now see that the affinity schemes are primarily aimed at

employees although they include the employees of the self-employed – and

the idea of including the self-employed in Serps or S2P has been dropped.

Stakeholder pensions are being targeted at group sales that can be

accessed through employers willing to run cost-efficient payroll deduction

rather than the more costly individual sale with personal direct debit.

The Government figures in Partnership in Pensions projected a stakeholder

market of 2.8 million people – both employees and self-employed – who

currently have no pension other than the basic state pension and Serps.

At the same time, the recent report from the Centre for Research in Social

Policy found that, of those workers with no pension provision, 62 per cent

were employees, 34 were per cent self-employed and the remaining 4 per cent

were part-timers. This is despite the fact that the self-employed make up

only around 12 per cent of the total working population.

So, we have the self-employed representing a much higher proportion who

are non-pensioned than the public at large. They are being largely ignored

by the stakeholder pension promotion despite the fact that they potentially

have an even greater need for pensions than employees.

This is because they do not qualify for Serps or S2P and will have to rely

on just the basic state pension in retirement if they make no personal


Interestingly, it is the very factors that make the self-employed less

attractive targets for stakeholder schemes that make them potential clients

of IFAs and company financial advisers.

The self-employed do not naturally fall into simple groups where a

straightforward presentation and a decision tree will cover all their

pension questions.

They are a group for whom the minimum income guarantee may be an issue

since they will not qualify for Serps or S2P. They often see their business

as their retirement fund and so are only interested in pensions that can be

an aid to their business.

They do not have an employer to pay their wages in the event of sickness

or accident so waiver or income replacement benefits need to be discussed.

While the introduction of net contribution from April 2001 will probably

be welcomed by the self-employed, some of the changes being introduced with

stakeholder pensions are not such good news.

The abolition of carry-forward and the restriction of carryback to just

one year will particularly hit the self-employed.

These facilities allowed them to make substantial contributions after

retiring and selling the business, thus wiping out any final-year tax bill.

Many self-employed people close to retirement may now need advice on

rethinking their plans now that carry-forward will go.

For those of the self-employed who have already started to make pension

provision, their generally entrepreneurial nature often leads them towards

Sipps rather than pooled insurance fund products.

For those looking to start retirement funding, the option of using a Sipp

to assist their business through property purchase may just be the deciding

factor in doing something rather than doing nothing at all.

All these aspects of retirement planning for the self-employed mean a good

adviser is needed to help the client find their way to the best result

which very often may not be a simple one-size-fits-all stakeholder


The self-employed are accustomed to paying professional advisers such as

accountants and lawyers for their advice and so they are likely to accept

the cost of advice, whether this is charged as a fee or levied through an

initial or annual charge in a non-stakeholder product.

So, despite all the pressure to focus on how an adviser can afford to deal

with stakeholder pensions by dealing with big groups of employees through

worksite marketing, we should not allow ourselves to ignore or forget the


We have seen above that the self-employed represent about one million of

the new stakeholder market in terms of those with no existing pension


We also know that the total self-employed market is around 3.5 million and

these are people who are likely to need – and value – the advice that can

be provided by a personal financial adviser, where the alternative is a

decision-tree process backed by an impersonal non-advice helpline.


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