Self-employed missing out on £4bn pension contributions

The study by Interactive Investor is based on what self-employed people would probably receive from a company if they were in employment, rather than working for themselves, and assumes they are missing out on employer contributions worth 3 per cent (the auto-enrolment minimum) of gross salary. 

Pension participation rates among the self-employed rose to 18 per cent in 2019-20, up from 16 per cent in 2015, according to the latest Family Resources Survey.

Nevertheless, this equates to roughly 3.5m people who are not making their own pension contributions.

As well as not getting employer contributions, they are also missing out on tax relief, which they are likely to receive if they choose to set up their own pension. This is estimated to be worth around £1bn a year — based on basic rate relief. 

The gap between self-employed individuals and employees should be addressed to prevent poverty for when the self-employed eventually stop working and become dependent on the state pension or pension credit, Interactive Investor stated.

For example, for a full-time employee on median pay of £31,461, the total 8 per cent pension contribution (percentage of gross salary) in one year would be £2,516, typically made up of an employee contribution (5 per cent) of £1,573 including tax relief (1 per cent) of £314 and personal payment of £1,258, as well as an employer contribution (3 per cent) of £942.

Meanwhile, a self-employed person earning the same amount and paying in the same proportions of income would have to pay the additional £942 to put themselves on a level playing field.

Becky O’Connor, head of pensions and savings at Interactive Investor, noted that self-employed workers “are at a disadvantage when it comes to building up adequate retirement savings because they tend to earn less, but also because they don’t have an employer to set up a pension for them or pay in employer contributions”.

“This is something the government needs to address as, ultimately, the self-employed are more likely to depend on the state if and when they do stop work, if they haven’t set aside their own pension provision,” she said.

The Department for Work and Pensions had announced it would work on improving pension participation and retirement outcomes among self-employed people by testing a number of different approaches in its auto-enrolment review in December 2017.

A year later, the government launched a paper on self-employed retirement savings, where it announced that it was exploring invoicing and accounting systems to enable automatic pension contributions from the self-employed.

However, no solution has been implemented so far, with several trials being implemented through the government-backed master trust Nest.