Getting more self-employed people saving for retirement is a key focus for the pensions minister and the Pensions Commission. Laurence O’Brien of the Institute for Fiscal Studies (IFS) explores how this could be done.
The low rate of pension saving among the self-employed is a challenge that policymakers have been grappling with for years, with no clear improvements in sight.
The pensions minister, Torsten Bell, recently described the lack of self-employed pension saving as a “catastrophe”. Currently, only around one-in-five self-employed workers save into a private pension, down from roughly half in the late 1990s.
There is therefore considerable policy focus on how to address the low levels of saving among the self-employed, with the second Pensions Commission expected to publish recommendations on this (and other issues) next spring.
It seems that the commission would like to replicate the success of automatic enrolment with self-employed workers. But this is not straightforward to do when, by definition, there is no employer that could be required to enrol the worker into a pension.
Exploring the options
The solutions for the self-employed will have to be different. Policies that make pension saving easier for the self-employed would be a good starting point for reform.
A universal solution would be to integrate pension saving into self-assessment tax returns. Self-employed workers could be required to make an active choice about whether they wish to make any more pension contributions when filling out their tax return.
This could be taken further by making pension saving the default, with an easy option to opt out in the form. Any contributions would then be paid to HMRC, which would divert them into a pension on the individual’s behalf.
An alternative is greater integration of pension saving into the business software and banking platforms that many of the self-employed use for managing their finances. Previous research and trials run by Nest have indicated that this could be effective in increasing pension saving rates among the self-employed, particularly if saving is offered on an ‘opt out’ basis, similar to automatic enrolment.
Pension saving from the start
In addition to these options, in recent IFS research we identify the point when employees move into self-employment as a potential key moment for policy intervention.
Currently, we find that even among employees consistently saving into a workplace pension, more than three-quarters stop saving into a pension after moving into self-employment.
This suggests that policies that make it easier for newly self-employed people to continue saving in a previous workplace pension pot could help the self-employed overcome some of the administrative hassle of setting up a pension. For example, employers or pension providers could be required to provide more details on how to continue saving in the same pension pot when employees leave their job.
Fundamentally, the status quo, in which the self-employed have to arrange their own pension plans without assistance, is not fit for purpose.
The good news is that potential building blocks for change already exist – in the self-assessment tax return system, in the business software and banking platforms the self-employed already use, and in the workplace pensions people leave behind when they strike out on their own.
The Pensions Commission’s recommendations next spring are an opportunity to put these elements to work. The insight that made automatic enrolment such a success – that the easy option should be to save – need not end when people become self-employed.
Laurence O’Brien is a senior research economist at the Institute of Fiscal Studies.
