An investigation into the saving habits of the self-employed has found that entrepreneurs want help to save for the long term, but are put off by the inflexibility and specific goal of pensions.
Improving the long-term financial health of the UK’s 4.8m self-employed workers has long been a goal for policymakers, but concrete solutions are yet top be found. The report by master trust Nest’s Insight research arm found that just 24 per cent of self-employed people save into a pension.
This is despite this demographic showing both an interest in, and willingness to, save for later life. Fifty-five per cent of respondents to the Nest Insight survey said they would welcome more guidance on how to save for retirement.
Reinforcing this conclusion is the finding that self-employed people make wide use of other savings tools; half of those surveyed save into instant access savings accounts and 37 per cent save into cash Isas, of which a proportion are saving for retirement.
Many are prioritising making ends meet, paying bills and investing in their business. Against this backdrop, the flexibility to decide how much to pay in month on month, year on year into a retirement savings vehicle is essential
Kate Smith, Aegon
The problem with pensions as savings vehicles, according to these freelancers and business owners, is that they do not correspond well to the unpredictable and variable income that is often a feature of their working lives. While 65 per cent of those who do not currently save into a pension said the reason was that they could not afford to do so, 61 per cent said it was due to the inflexibility of pensions.
The survey also found that the self-employed see less of a clear distinction between working life and retirement. Instead, they think of their finances more holistically and tend to save for the long term, rather than for finishing work at a specific age.
Jo Phillips, Nest Insight’s head of research and innovation, said: “Although most self-employed people say they want to save for retirement, many struggle to do so in practice. Encouragingly, most are open to help, guidance and encouragement to get on track with saving for later life.
“We know that control and adaptability to changing circumstances are really important for self-employed people, as is some element of access to their money in case of need, often due to the varied pattern of their income.
“We’re currently exploring opportunities to build in simple and easy ways to save within the personal finance and accounting platforms they already use, and looking at how to communicate more effectively with self-employed people via the channels they’re turning to most frequently for financial guidance and advice,” she added.
Targeted interventions could bring savers in
The second phase of the research will explore how targeted interventions can improve later-life adequacy among this cohort. Nest said it plans to trial four approaches, presenting pensions as palatable contributions, emphasising flexibility, focusing on tax benefits, and using loss avoidance as a behavioural tool.
For example, emails may ask trial participants “could you save £2.50 a day?”, after respondents said they preferred to contribute a set amount over a percentage of income. “A tax-free way to save for your retirement”, and “don’t miss out on pension returns” are also among the messages being used.
Targeted interventions form part of the Department for Work and Pensions’ auto-enrolment strategy, unveiled in December 2017 after a review of the sector. At the time, the DWP parried criticism for not exploring concrete measures like auto-enrolment via tax returns, claiming that the diversity of the self-employed population meant “there is no one uniform solution”.
Responding to the Nest research, Guy Opperman, minister for pensions and financial inclusion, said: “We want to boost the future prospects of millions of hard-working self-employed people, including younger and lower-paid workers, and that’s why we’re trialling various approaches that could help them plan ahead financially for later life.
“Nest Insight’s extremely helpful report has informed the work in progress, and I look forward to seeing the positive interventions that follow.”
Nudge principles could still work
Some experts continue to advocate more concrete measures.
Kate Smith, head of pensions at Aegon, said: “The self-employed represent a big gap in an otherwise improving pensions landscape. Auto-enrolment has nudged many people who were not saving for retirement in the right direction, but the self-employed are effectively excluded.
“We believe that building on the nudge principles from auto-enrolment combined with the digitalisation of tax have a role to play in building solutions for the self-employed.
“Paying tax more frequently could act as a prompt for people to consider their savings at the same time,” she added.
Government must revise AE or ‘risk leaving a whole generation behind’
While automatic enrolment has added more than 10m employees to a workplace pension scheme since 2012, experts say it is still not enough to ensure adequate levels of saving towards retirement.
However, Ms Smith conceded that income volatility means the current pensions framework will not be suitable as the sole vehicle for self-employed saving.
“Many are prioritising making ends meet, paying bills and investing in their business. Against this backdrop, the flexibility to decide how much to pay in month on month, year on year into a retirement savings vehicle is essential,” she said.
“Pension funds offer valuable tax incentives but are not accessible in emergencies before age 55, meaning for many self-employed saving for retirement might best involve a combination of pensions and more accessible savings products such as Isas.”
