The favoured solution by Aviva and Royal London is to use the annual self-assessment process to default the self-employed into pension saving. As part of completing an annual tax return, self-employed people could nominate a pension provider or scheme to receive any contributions and would have a sum automatically added to their total tax bill, perhaps equal to 4% of their taxable profits. With standard rate tax relief this would mean 5% of profits would go into a pension unless the self-employed person actively opted out. The fact that the contribution would go up and down in line with the ups and downs of the self-employed person’s business would provide a flexibility which would be welcomed by many self-employed people.
The recommendation is made in a new report from Aviva and Royal London titled “Solving the under-saving problem among the self-employed". In 2014/15 only 1 in 7 self-employed people contributed to a pension, but there is now growing momentum to find a solution, including:
The Government’s 2017 review of automatic enrolment promised to “…consider how the growing numbers of self-employed people can be helped to save for their retirement”;
The Conservative manifesto (p64) said: “we will continue to extend auto-enrolment to small employers and make it available to the self-employed”.
The new report begins by describing current patterns of pension scheme coverage, showing that women and low-paid self-employed workers have particularly low levels of coverage. It then reviews a range of policy options which have been recommended in the past, including government incentives to save or use of the Lifetime ISA instead of a pension.
Commenting on the report, John Lawson of Aviva said: “The lack of retirement provision amongst the self-employed is reaching crisis levels. Whilst automatic enrolment has helped to reverse declining participation amongst employees, the situation for self-employed workers remains dire. Many will simply be unable to afford to retire unless urgent action is taken.”
Steve Webb, director of policy at Royal London, said: “Automatic enrolment has shown the power of ‘nudges’ to get people saving. Using the annual tax return process to ‘nudge’ self-employed people into starting saving for their retirement could bring a breakthrough in pension coverage for the self-employed in the same way as has already happened for employees. It is vital that we build on the momentum for action in this area and take forward practical proposals as a matter of urgency.”
The Government’s independent reviewer of “Employment Practices in the Modern Economy”, RSA Chief Executive Matthew Taylor, will speak at the launch of the report.
Matthew Taylor said: “There are many areas in which self-employed people may miss out compared with employed earners, and access to automatic enrolment and an employer pension contribution is one of these. I welcome this report which suggests one practical way in which the existing system could be modified to improve pension coverage among the self-employed”.
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