Considering self-employment? These are the problems you must be aware of: Sarah Coles

There are all sorts of great reasons for working for yourself. Our research found biggest draws were having flexibility over your hours, being your own boss, choosing the work you do, working from home, and following your passions. However, it does come at a cost. In an independent review of self-employment for the government in 2016, self-employed people said the things they missed most about being employed were their colleagues, the support they had at work, regular income, job security and benefits like sick pay, holiday pay and the pension.

Missing out on benefits through work leaves a gaping hole. The HL Savings and Resilience Barometer found that while 71% of employees would get a pay-off if they were laid off, only 12% of self-employed people would. Meanwhile, 95% of employees would be paid if they were too sick to work, while only 33% of self-employed, people have this protection.

Income from self-employment varies dramatically, because the types of work people do, and their hours, are so varied, so there are some incredibly high earning self-employed people, and some at the other end of the spectrum. However, when you look at the most common salaries in the financial year ending 2016, for employed people it centred around £400 and for self-employed people it was around £240 a week.

Lower incomes take a toll on your financial resilience. It’s one reason why households headed by a self-employed person have an average of £275 left over at the end of the month – compared to employed households with £322. It means fewer of them have enough left over to be secure, fewer have enough put aside in emergency savings, and more of them are concerned about their debts.

But it’s their preparations for the long term where they really suffer. Only 23% of self-employed households overall are on track for a moderate retirement income. This compares to 46% of employed households. It’s worth bearing in mind that a moderate retirement isn’t the lap of luxury, and involves things like one European holiday a year rather than a life of travel and entertainment.

The fact the self-employed have less saved for the future isn’t a major shock, because not only are they wary of tying money up while they’re dealing with insecure incomes, but they’re also outside the auto-enrolment rules which automatically put people into workplace pensions. Even where they are doing their best, they get no extra pension contribution from an employer to supercharge their efforts.

The figures aren’t quite as bad as they seem, because self-employed people do save into other vehicles - such as property and investments but pensions are less popular, so they don’t have the benefit of tax relief. They’re also facing very specific risks if they focus their investments in property. If they plan to retire on the income, they’re vulnerable to periods when they can’t let the property or where the tenant doesn’t pay the rent. They also face the risks of the cost of repairs and maintenance eating the rent. If they plan to sell up and retire on the profit, they’re subject to unpredictable price movements – and the fact that property can take far longer to sell than you expect.

It means that anyone who already works for themselves needs to think about their financial resilience as early as possible. Around two thirds already have enough emergency savings, but if you don’t have cash to cover 3-6 months’ worth of essential expenses in an easy access savings account, building those savings should be a priority. It’s also vital to revisit your insurance cover, and think what would happen to your family if you were unable to work for a period.

In terms of retirement savings, we’d like to see the Lifetime ISA change, so it can be a more effective way for self-employed people to save for later life. This would mean cutting the penalty if you need to take cash out for emergencies along the way – so you only lose the government bonus rather than your own money. We’d also like people to be able to open and pay into them until the age of 55 – reflecting the fact that self-employed people tend to be older – and when the scheme was introduced, 70% of them were already too old to take advantage.

But it’s important not to wait for legislative change to take action. It can be difficult to make regular large pension contributions when your income varies, but it’s easy to make smaller ones, and then revisit your position at the end of the tax year to see if you can afford a bigger lump sum, or to boost your monthly payments. It’s also worth knowing that you don’t have to stick with all your monthly payments at all costs. If you can see a short-term financial squeeze looming, you can usually halt the contribution for that month, so you can manage your cash flow.

If you’re planning a move into self-employment, you can get a head start with your planning. If you take stock of the gaps on your finances that will open up when you take this step, you can plug them immediately – or as soon as it’s practical.

When you work for yourself, you suddenly become responsible for all sorts of thing you never had to worry about before, and this includes some areas of your finances. However, if you can get to grips with this sooner rather than later, not only will you have the job of your dreams, working for the best boss in the world, but you’ll also have financial security to make the transition much easier.

UK ISA could be a red herring

Last weekend there were all sorts of rumours being circulated ahead of the Autumn Statement, and one that piqued plenty of interest was a UK ISA. This was a kind of stocks and shares ISA that would only allow investment in UK companies – in order to boost funding for UK firms. The idea was that it would come with an allowance of its own – and therefore increase the overall ISA allowance.

An increase in the ISA allowance would definitely be a shot in the arm for investors battered by cuts in the allowances for dividend tax and capital gains tax. However, the notion of a UK-specific ISA allowance just adds a needless extra layer of complication. It’s hard to find any potential investor in the country saying ‘well I would invest, but there just aren’t enough different kinds of ISAs to choose from.’ It makes far more sense just to increase the ISA allowance and wait for more UK investments to flow as a natural consequence.

Just adding to the overall allowance would automatically encourage more UK investment. Over the past year, broadly three-quarters of investments by our clients have been in the UK anyway, and most investors buy and hold for the long term. Sometimes the easiest solution is the best one.

Sarah Coles is Head of Personal Finance and Podcast Host for Switch Your Money On. She is the Headline Money Expert of the Year.