A huge hole in old-age savings could put every UK retiree at risk of a financial shortfall, warns a new study. The self-employment pensions-gap could overwhelm the state pension, increase pensioner poverty and prompt a downward shift in living standards, it finds.
With the self-employed sector growing by 50 per cent since 2000 to reach almost 5 million people, research for IPSE (the Association of Independent Professionals and the Self-Employed), is the latest nudge for the government to take immediate action on the yawning gap between the retirement savings of employed and self-employed workers.
Less than a third of self-employed people are saving into a pension at a time when automatic enrolment in the workplace pension is helping create a very different future for those working for others.
Crisis for some, problem for all
But IPSE warned that if this issue is not addressed, sooner rather than later we could all face serious consequences as the current generation approaches retirement age.
“The state pension is already under significant pressure and its future has already been called into question in recent years. Failure to alleviate the self-employed pensions crisis will only exacerbate the burden on the state further,” says Jonathan Lima-Matthews, senior policy adviser for the IPSE.
“If a large proportion of self-employed people enter retirement and rely on the modest state pension as their primary, rather than supplementary source of income, we may see an increase in pensioner poverty and a downward shift in living standards.”
Most at risk of a poverty-stricken old age include those new to self-employment, younger self-employed people and women.
The IPSE blames the lack of an auto-enrolment equivalent for one-person bands, the inaccessible reputation of old-age savings and the simple fact that saving for later life is a distant, unengaging prospect that can’t compete with more immediate priorities.
One option, the report suggests, is a so-called “sidecar pension” which would channel money into both a pension pot and a separate emergency or rainy-day fund.
But solutions could also include a midlife retirement savings MOT, better financial education in schools and universities, and resisting the temptation to mimic the workplace pension in the self-employed and gig economy.
“One of the biggest challenges facing the self-employed is the lack of certainty and security of income, which is particularly evident for those with lower and moderate incomes,” adds Jon Greer, head of retirement policy at Old Mutual Wealth.
“Only a third of self-employed people are saving into pensions. Without Government intervention this is unlikely to change, but a copy-and-paste approach cannot be used to extend auto-enrolment to the self-employed.
Not everyone agrees that the employed workplace can’t offer a way out of the problem, however.
Please don’t go
“Auto-enrolment has nudged many people who were not saving for retirement in the right direction but the self-employed are effectively excluded,” says Kate Smith, Head of Pensions at Aegon. “These recommendations provide a sensible framework for policymakers considering how to support what is a diverse and growing workforce including everyone from plumbers to accountants.
Ms Smith adds: “Unlike IPSE we believe that building on the nudge principles from auto-enrolment combined with HMRC’s initiative ‘making tax digital‘ do 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 says.
“Continuing to use existing workplace pensions is also a solution. With 44 percent of self-employed people aged between 50 and 65, it’s highly likely they will have been employed before and therefore have saved into one or more workplace pensions. These have the potential to offer the flexibility that the self-employed need.”
“The one measure we think should be added to this list is the right for individuals to ask employers to pay pension contributions into a pension of their own choice,” says Tom McPhail, head of policy at Hargreaves Lansdown.
“This would strengthen individuals’ relationship with their retirement savings and increase the likelihood of them continuing to save when moving between jobs or going self-employed.
“Most self-employed people start their working lives in employment, on average not making the switch to self-employment until the age of 32. So the self-employed challenge isn’t just a question of getting them into pensions. It’s more one of how we stop losing them when they transition from employment to self-employment.”
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