Helping younger generations plan for retirement on a zero-hour contract

Financial News

The Office for National Statistics reported in April that the number of people employed with no set guaranteed working hours had risen by 100,000 to 1.8 million, over 12 months.

This is worrying, as the number of zero-hour contracted employees had previously been in decline since 2015. Unfortunately, with no guaranteed hours, these employees may be put in an unstable financial position. Whilst the impact of such an arrangement will not be felt immediately, there may be repercussions affecting later life as well.

It is likely that you don’t have a zero-hour contract yourself but think about your children or grandchildren. In the current ‘gig economy’, more and more younger people are turning to employment with no guaranteed working hours, and they may need your help to plan for a brighter future.

The problem

The issue facing zero-hour workers is threefold:

1. Automatic enrolment

Workplace Pension contributions have increased for those who have been automatically enrolled. But where does that leave those workers who do not qualify, such as some people on zero-hour contracts?

Automatic Enrolment means that everyone aged between 22 and State Pension Age, who earns more than £10,000 per year will be part of a workplace pension, into which employers and employees both pay in, monthly. Unfortunately, zero-hour contracts are generally associated with lower wages, which means that some people have not been included in a workplace pension.

2. Effects on State Pension

Entitlement to a State Pension is dependent on making National Insurance contributions. You will need to have a minimum of 10 years’ contributions on your record when you retire, to receive the minimum State Pension. For the maximum State Pension, you need 35 qualifying years.

Qualifying years can be accrued in three ways;

  • Paying National insurance through employment
  • Making voluntary contributions to bridge gaps in your record
  • Using National Insurance Credits, which are included in some State Benefits.

If you earn between £116 and £162 per week, you do not need to pay national insurance and your record will be automatically completed. However, if you earn more than this, you will pay National Insurance from your earnings.

The complications arise when you consider that a zero-hour contract could mean that a person fluctuates between qualifying to pay National Insurance and not, from week to week.

Therefore, you will need to monitor your National Insurance record to ensure that you are up to date and paying what is necessary to get the State Pension in later life. Alternatively, you can ask us to do it for you.

3. Difficulties in retirement planning

We’ve established that the earnings for someone on a zero-hour contract can vary from week to week, but that can also make retirement planning more difficult.

When paying into a pension, whether workplace or personal, the amount that you can afford to contribute each month is likely to vary in accordance with your pay for that period. This adds an element of uncertainty into your retirement planning and can make the process quite complicated for the average person. However, as independent financial planners, we can take care of that for you and explain anything that isn’t 100% clear.

The solution

There isn’t a one-size-fits-all strategy that will allow everybody on a zero-hour contract to boost their retirement savings. As with most things in life, everyone’s circumstances are different, and a variety of methods will be needed to fix these issues.

For zero-hour contract employees looking to improve their retirement finances, our top four tips are:

  1. Opt-in, if possible: Anyone earning more than £6,032 per year (£6,036 if paid monthly) can ask their employer to include them in the workplace pension. Anyone doing this will see contributions of 3% of their qualifying earnings (annual pay between £6,032 and £46,350) taken from their pay before it reaches them. This is added to their employer’s contribution, which will currently be equal to 2% of their qualifying earnings, though minimum contributions are set to rise in April 2019 to 5% employee and 3% employer contributions. This is on top of tax relief which sees your own contributions increase by 20%.

So, if you contribute £100, tax relief increases that to £120, and your employer’s contributions boost it even further.

  1. Take advantage of other options: If opting in isn’t possible, the next step is to consider putting money away elsewhere. This may be a Lifetime ISA, or personal pension, both of which benefit from tax relief and are designed to help plan for retirement.
  1. Check your State Pension: As discussed earlier, the hours worked may impact your National Insurance records, so make sure that you check it each year to see whether you need to make any voluntary contributions to work toward a financially stable retirement.
  1. Adapt your strategy to the circumstances: Put simply, this means saving more during periods of increased hours, and being thriftier during months where less income is available. For many zero-hour contract employees, there will be seasons during which working hours are increased, try to plan and take these fluctuations into account.

Seeking financial advice

Whatever your circumstances, or those of your loved ones, there are solutions available. As independent financial advisers, we can help you to find them and gain the knowledge needed to help those you love to secure a fulfilling retirement lifestyle.

To discuss any aspect of retirement planning, please get in touch with Sarah or Bev on 0115 933 4833.