41% of self-employed people in the UK are at risk of falling into financial crisis.
Are you one of them?
A lack of disposable income to put into savings and mistakenly believing that they are not eligible for income protection insurance are the two main reasons why approximately two million self-employed people are vulnerable, should they lose their income suddenly, according to research from LV=.
The two best methods of protecting yourself against a sudden loss of income are:
- Building up your savings
- Taking out income protection insurance
Of course, both options come in a range of types and suit different circumstances, but both perform one simple task: They make sure that, should you be unable to work for any reason, you will be able to cover your living cost. This protects both you, and equally importantly, your family.
In short, they are a safety net.
The challenges facing self-employed people
Saving money for the future is one of the biggest challenges facing self-employed people. The most common reasons they struggle to save are:
- Bills: Self-employed people earmark an average of 64% of their monthly income to pay bills, compared to the national average of 56%.
- Debts: The national average shows that 32% of people are battling debts. Within the self-employed sector, that number rises to 38%.
- Unexpected costs: Self-employed people are 5% more likely to encounter an unexpected and costly situation than the national average. With 33% of self-employed people claiming that a broken washing machine or car repair is at fault for their empty savings account.
Income protection insurance is an excellent defence against suffering a crisis because of sudden financial shock. However, despite 28% of self-employed people fearing the consequences of being unable to work, only 4% are covered by a policy.
42% of unprotected self-employed people mistakenly believe that they are not entitled to any form of income protection. This is not true and it is advisable that all self-employed people, including sole traders, freelancers and micro-businesses, research their rights properly to avoid missing out on essential cover.
What this means for self-employed people
In an ideal world, you should have two types of savings account:
- Short-term savings: These are to be used in emergency situations, such as fixing a broken appliance or vehicle, to keep your life and business running.
- Long-term savings: This is your retirement fund, which will sustain your lifestyle when you decide to stop working.
Unfortunately, most self-employed people do not have sufficient savings to support them, should they lose their income for any period. LV=’s study showed that;
- 41% of self-employed individuals simply do not have enough income to commit to regular saving
- 11% put less than £50 into their savings each month
- 33% of self-employed people would not be able to sustain their lifestyle for longer than three months if they suddenly lost their income
In an even more ideal world, you will have sufficient income protection insurance. This will provide an income in the event of an accident, illness or injury which takes you out of work temporarily or permanently (depending on the type of cover).
In the event of a loss of income, the 96% of self-employed people who do not have this protection face the possibility of:
- Losing income due to sickness or injury
- Being taken over by debt
- Losing assets, property and vehicles due to non-payment
- Exposing themselves and their family to financial crisis and hardship
- Making it more difficult to access financial services, such as mortgages or credit in the future
Turning things around
Self-employed people do not benefit from the many schemes in place through employment. This includes access to:
- Sick pay
- Maternity/paternity leave
- Workplace pensions
- Annual leave entitlement
All of which provide valuable protection and a safety net. These keep employees and their loved ones secure in the event of a life event which would otherwise result in less household income. It is therefore wise for self-employed people to take steps to ensure that they have protected themselves in case of financial shock or an emergency.
Whilst those in employment benefit from the schemes put in place by their employer, it is important to remember that you are your own employer. Therefore, you have a duty to look after and protect yourself, just as you would with your own employees.
We have put together a guide to accessing mortgages when you are self-employed, read it here.
If you are self-employed and want to know more about financial planning, savings and income protection options, contact us on 0800 612 8099 or complete our online enquiry form by clicking here.