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Posted: Wed 11th Sep 2024
Almost two million self-employed people face financial challenges after retirement because they are not saving into a private pension, a new report has warned.
According to the Institute of Fiscal Studies (IFS) report, 500,000 of 2.3 million self-employed individuals earning over £10,000 have a private pension, compared to 80% of employees.
The statistic represents a collapse in pension participation by the self-employed since 1998, when 60% were saving into a pension.
The IFS said the sharp decline means that three-quarters of self-employed workers will have an retirement income below £15,000 a year, compared to only around a third of employees.
The report criticised the government's current pension policy as "not fit for purpose" and said it is "not making it sufficiently easy for the self-employed to make good saving choices".
IFS called on the government to consider several reforms including requiring all self-employed individuals filling out a Self Assessment tax return to make an active choice about the level of pension contributions they want to make, and introducing an automatic enrolment pension system like the one that exists for employees.
In addition, the report said defaults on direct debit pension contributions by the self-employed should be changed so that they increase automatically, such as in line with inflation. This, the study argued, would ensure that they contribute a more appropriate amount over time.
Laurence O'Brien, research economist at the Institute for Fiscal Studies, said:
"Successive governments have put great effort into establishing automatic enrolment for employees to make it easier for them to save for retirement and have done so with much success.
"In contrast, the self-employed are left to their own devices. People who spend a long time in self-employment are all too often on course to be reliant on their state pension, some modest other savings, and potentially a partner's pension or an inheritance to provide for them in retirement."
Mubin Haq, chief executive of the abrdn Financial Fairness Trust, which was a partner for the report, added:
"The self-employed make up an increasing share of the UK's workforce but far too many are on track to have a poor retirement. More than half have no private pensions savings. Auto-enrolment was a sea-change for employees, rapidly increasing the numbers saving into a pension.
"We now need to use similar methods for the self-employed to actively nudge them into thinking about their financial futures. Changes to retirement savings take a long time to bear fruit so there is an urgency to ensuring action is taken sooner rather than later."
