Steve Thomas, deputy general secretary of the trade union Prospect, says it is not enough just to encourage more saving among self-employed people – they need a sustainable, affordable way to do so.
Poor retirement outcomes for self-employed workers is one of the main concerns identified by the Pensions Commission.
The basic problem is that our pension system is a tripartite arrangement: workers, employers, and the state all contribute. But for self-employed people, there is no employer contribution. Their pensions are like a two-legged stool, a very unstable foundation for retirement.
This is a major concern for Prospect because we represent tens of thousands of self-employed workers.
Self-employed trade union members may seem paradoxical, but it is the result of the way some industries are organised, which forces workers into self-employment. The BECTU sector of Prospect, for example, organises self-employed workers in creative industries such as TV and film production, theatre, and live events.
Assessing the self-employed pension problem
One of our priorities is to be very clear about the problem that must be solved.
Poor retirement outcomes for the self-employed are usually illustrated by quoting extremely low self-employed pension participation rates. This can unhelpfully conflate the aim of improving retirement outcomes for the self-employed with the objective of increasing self-employed participation in pensions.
These are different goals, and the latter is a very ineffective way of achieving the former.
The Pensions Commission’s evidence pack provides very useful data about self-employed workers’ retirement planning, in its widest sense.
Our recent survey of Bectu freelance members showed results consistent with the commission’s findings: 37% reported no retirement savings last year, with 81% saying they could not afford to save.
A widely quoted Pensions Commission statistic was that just 4% of people with only self-employed earnings contributed to a pension. But low participation is a feature, not a bug, of pensions as experienced by the self-employed.
While employees benefit from employer contributions (and sometimes salary sacrifice), the only incentive for the self-employed is tax relief. The net (ie end-to-end) tax relief for a basic-rate taxpayer is only £5 of additional after-tax retirement income for every £80 of take-home pay foregone.
While welcome, it will not usually be worth locking savings up for decades for this, especially when earnings are unstable and businesses might need investment.
It seems like a particularly bad deal compared to the 25% incentive for contributing to a Lifetime ISA, for example.
The incentives are stronger for higher earners, who get better tax relief, and for older workers. Indeed, participation is higher for them – albeit still very low.
The self-employed have worked out that pensions are a poor way for many of them to save for retirement, so why is the industry determined to push them into contributing?
Finding a better way to save
Instead of trying to increase pension participation, we should focus on better ways for the self-employed to save for retirement.
One approach could be a retirement savings product for the self-employed that has the same tax treatment as the Lifetime ISA. It could also be adapted to better reflect the savings needs of self-employed workers in different ways, such as allowing limited withdrawals for business investment.
However, we must be realistic about the potential for self-employed workers, particularly those with the lowest profits, to save enough for a decent income in retirement.
No savings product can magically turn a small percentage of a low level of profits into a decent income in retirement. Where the market cannot provide a solution, the state should step in.
The obvious solution for low earning self-employed workers to have a decent income in retirement, is to give them more state pension. Throwing money at a problem is easy. The difficult part is paying for it.
Different features of the National Insurance system might present a neat solution. A flat-rate State Pension top-up for the self-employed would target resources at those who need it most. This new benefit for the self-employed would have to be paid for by additional National Insurance contributions by the self-employed.
As self-employed National Insurance contributions are profits-related, the top-up would be redistributive, meaning a relatively small contribution from lower earners would pay for a meaningful increase in retirement income. Aligning National Insurance contributions between the self-employed and employees a bit more could even help address the incentives not to employ workers in some industries.
The top-up could be unfunded, which would mean the extra contributions would raise money in the short-term for the government’s spending priorities, or it could be pre-paid, creating a multi-billion fund for national priority investment projects.
Steve Thomas is deputy general secretary of Prospect.
