Self-employed workers lack confidence in pensions partly because of questions over their affordability, according to experts.
There are now about 5m self-employed workers in the UK according to the Office for National Statistics. Pensions Policy Institute research indicates that only 28 per cent of self-employed people see pensions as the safest way to save, compared with 52 per cent of employees.
Currently, the self-employed do not fall under auto-enrolment requirements. Yet, about 2m self-employed workers meet eligibility thresholds for “an automatic enrolment type approach”, the PPI has said.
It’s particularly critical for the self-employed because otherwise we lose them
Tom McPhail, Hargreaves Lansdown
Of this 2m bracket, 77 per cent are male and Gen X is the most strongly represented generation. The PPI uses this category to describe workers aged between 35 and 49.
Reforms to auto-enrolment could help to improve engagement and subsequently maintain contribution levels among the self-employed.
Help entrepreneurs find money for pensions
Employers are currently preparing for a rise in the minimum level of pension contributions. As of April 6, the minimum employer contribution will grow to 2 per cent from 1 per cent.
At a technology hackathon hosted jointly by the Department for Work and Pensions, HM Treasury and the Association of British Insurers, the chief executive of fintech company Moneyhub Enterprise, Samantha Seaton, predicted that the self-employed would not boost their own contributions. She said that we might on the contrary witness a rise in opt-outs.
Seaton suggested that the self-employed lack the confidence to commit to pensions. Entrepreneurs need help finding the “money that you don’t know that you’ve got”, she said.
An absence of faith in pensions is not helped by the current level of engagement among the self-employed, which is poor, according to Michelle Cracknell, chief executive of the Pensions Advisory Service.
She said that the proportion of self-employed workers who contact TPAS is “very low”. In her view, long-term savings are “low down the self-employed shopping list”.
Older workers are the most exposed
Figures from the ONS indicate that male part-time self-employed workers are highly reliant on their pension; pensions and retirement income make up 33.9 per cent of their total earnings.
There are more older workers moving into self-employment, according to Daniel Tomlinson, research and policy analyst at thinktank the Resolution Foundation. He described Gen X as the demographic that is “most at risk”.
He also said that while millennials generally are doing well in pension terms because of auto-enrolment, millennials who are self-employed are “probably struggling”.
Between 2006-2007 and 2015-2016, the number of self-employed making pension contributions more than halved, according to HM Revenue & Customs data; but between 2014-2015 and 2015-2016, the average value of contribution per individual went up by nearly a third, to £5,310 from £4,070.
By contrast, over the same period the average annual contribution from an employee was £2,570.
Tomlinson attributed the rise in overall levels of self-employment to tax rules. For a worker costing a firm £100,000, a self-employed worker gains a tax advantage of about £7,000 over a similarly expensive employee, according to the Resolution Foundation.
Reform to keep workers saving
The proliferation of the gig economy in the UK, with the success of companies such as Uber and Deliveroo, has characterised an increase in the number of self-employed workers.
These workers tend to be on the lower end of the pay scale. Low-paid self-employed workers are less likely to save into a pension, according to the Resolution Foundation.
But research shows that so-called ‘privileged’ sectors, such as law, IT and consultancy, are also experiencing a boom in self-employment.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, argued for reforms to auto-enrolment that would allow individuals to maintain the same pension pot when they move between employers, and encourage them to keep making contributions if they become self-employed.
What technology means for pensions
John Glen, economic secretary to the Treasury, says that technology may present an opportunity to help the self-employed with their pension saving.
It is important that “the pensions system has in place mechanisms to reach out and engage those individuals and encourage them to continue their pension funding”, McPhail said.
“It’s particularly critical for the self-employed because otherwise we lose them. Getting them back again is particularly challenging.”
