Mortgages, pensions and other savings products are not designed for self-employed workers – here’s what needs to change
A growing number of us are choosing to go it alone. According to recent figures from the Office for National Statistics, the number of self-employed workers is now nearing the five million mark.
That’s around 15 per cent of the UK workforce, and a million more people than the same period in 2009, with London seeing the biggest rise of all UK regions.
The numbers are also expected to keep rising. In fact, training company the Knowledge Academy says that 67 per cent of Brits are thinking about quitting their jobs to go freelance.
But while being your own boss has its perks (for many people, it’s the answer to a better work-life balance), it also comes with challenges, particularly in terms of financial security. Largely, this is because many financial services products – like pensions and mortgages – haven’t been designed with this emerging cohort in mind.
Take, for example, the fact that only people in permanent jobs can reap the benefits of pensions auto-enrolment, leaving many self-employed people with few options when planning for retirement. Or consider how freelancers can be locked out of the mortgage industry if they don’t have at least two years’ worth of accounts or self-assessment tax returns.
Indeed, borrowers with a “lumpy” income (that is, without a regular monthly wage) are often refused loans because they don’t meet the standard mortgage lending criteria, says Richard Rowntree, director of mortgages at Bank of Ireland UK.
“These people often have perfect credit records but are restricted. The world of work has changed, yet many banks haven’t.”
It is for this reason that vast swathes of the market remain under-served.
So what changes could make life easier for self-employed workers?
Housing your money
Before granting a mortgage, lenders want proof that potential borrowers have a reliable income, which means that self-employed people are expected to provide huge amounts of evidence.
Some lenders also prefer you to ask an accountant to prepare your documentation, which means that freelancers can end up paying additional costs, making the mortgage process more expensive and time-consuming compared to applicants who are employed.
Ishaan Malhi, chief executive of online mortgage broker Trussle, thinks that lenders should consider the current income of self-employed applicants, as well as their earnings trajectory, in order to assess affordability.
Malhi also argues that Open Banking should reduce the amount of documentation needed. “By improving communication between accounts, brokers, and the government, we can make the process more transparent for all self-employed borrowers.”
Pension-less
In addition to housing, pensions are a top concern for self-employed people.
The consensus view among many experts is that this group should be brought into the auto-enrolment regime, so that savers can be encouraged to contribute to their retirement.
Jon Greer, head of retirement policy at Quilter, points out that the number of self-employed people in the UK has increased by more than 17 per cent since auto-enrolment was first introduced in 2012. “That is a big shift in the composition of the UK’s workforce in just seven years,” he says.
The think tank Demos has suggested that the government could act as a de-facto employer of self-employed workers by contributing four per cent into their pension pots, which is equivalent to the three per cent employer contribution and one per cent tax relief given to employees.
Planning for retirement often takes a backseat when you’re self-employed, so Greer suggests that the government could consider using the annual tax-return to nudge people into choosing a pension arrangement.
Pete Glancy from Scottish Widows points out that regular contributions via auto-enrolment don’t always suit the self-employed because they prefer to have the flexibility to invest larger lump sums when business is good. He therefore suggests that contributions could be linked to profitability, removing that psychological hurdle to saving.
Serious about saving
Other types of savings products should also be adapted for those with fluctuating income.
Some savings accounts won’t earn you interest unless you transfer a minimum amount of money each month, which creates an all-or-nothing mentality around saving. Of course, there are lots of different savings accounts to choose from, but more providers could make use of behavioural nudges to encourage people to save what they can afford that month, rather than imposing a strict lower limit.
The Lifetime Isa is also ill-suited to the unpredictable nature of self-employed work, because you can be hit with a hefty penalty charge if you withdraw money before you’re 60 (unless you are buying a house). Many freelancers understandably have doubts about locking their money away for such a long time in case something unexpected happens.
Given that a higher proportion of 16 to 24 year olds are opting for self-employment, it seems like an oversight for a savings product created for young people to neglect the needs of this growing subsection.
The challenge for providers is that this expanding group have few unifying features. Indeed, Greer points out that there is quite a difference between a freelance delivery driver and an IT contractor in the City, making it hard for providers to serve them at scale.
But what this really highlights is that providers can no longer rely on a one-size-fits-all approach; better use of technology will be necessary to serve a customer base that is becoming increasingly diverse.
As Andy Piggott, director of lending products at Metro Bank, says: “Banks face a choice – to support the needs of self-employed customers or risk losing them. It’s about giving people the flexibility they need.” Doing nothing is no longer an option.