Policies for increasing long term saving of the self-employed, finds that just 2 million self-employed workers would be captured under the current auto-enrolment framework. This would disproportionately impact women by excluding 73 percent of the female self-employed workforce.
A million people have become self-employed since 2008, bringing the total to nearly five million. The government will consider ushering them into pensions by default under its ongoing auto-enrolment review.
The report takes an in-depth look at the make-up the UK’s five million self-employed today. It illustrates the very diverse nature of the self-employed and the risks of treating them as a homogenous group when forming long-term savings policy.
The report reveals that:
The self-employed are less likely to save into a pension, with just 12 percent actively paying in today.
Only 28 percent of the self-employed believe pensions are the safest way to save.
The changing shape of self-employment risks exacerbating under-saving among younger workers and women, with the number of female self-employed workers growing quicker than men and millennials entering self-employment in the largest numbers.
Only 7 percent believe the largest part of their retirement income will come from their business.
Around half a million people combine self-employment and normal employment.
Old Mutual Wealth is recommending a multiple policy approach to increase savings for the majority of the self-employed. It says the biggest challenge facing the self-employed is the lack of both certainty and security of income that prioritises their attention on short term finances.
Old Mutual Wealth’s recommendations include:
Using the annual tax-return to nudge a self-employed person to nominate a pension arrangement to receive a pension contribution. This could be an existing arrangement; one they have chosen to use; or pointed towards a guided shortlist of suitable schemes.
Examining the possibility of a ‘sidecar’ model for self-employed pensions to create an optimal level of liquid savings (e.g. one-sixth of annual income), while maximising long-term savings by contributions being paid into a combined account structure initially distributed between a liquid account and another which is the pension account. Once funds reach a certain level in the liquid account, then all contributions would be paid into the pension account.
Considering a coordinated package of changes aimed at increasing retirement savings across the breadth of the self-employed. For example create a collective income protection scheme which can generate the economies of scale needed to reduce costs. Also look at whether there is a case for greater parity in parental benefits between the self-employed and the employed.
Jon Greer, head of retirement policy at Old Mutual Wealth, says: “As the government embarks on its review of auto-enrolment, it needs to think about how it will adapt this successful policy to fit with current working practices. Currently, the self-employed are left out of this policy and with indications that that population is set to outstrip the number of public sector workers by 2020, the government needs to ensure it tackles the growing savings gap.
“But a savings policy for the self-employed also needs to acknowledge that there are legitimate reasons why some self-employed people do not engage in pensions. So to increase that engagement more innovation is required.
“For example, auto-enrolling the self-employed will probably mean using the tax return system to place them in a pension. But around 500,000 self-employed people have recently left employment, and are likely to have been auto-enrolled by their employer. Making them undergo a second form of auto-enrolment when they become self-employed is counter-productive and government should instead make it simpler for people to pay into their existing scheme where possible.
“The savings system also needs to recognise that not all self-employed people will want to commit money into a pension and there may be good reasons for this. 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. There is evidence that they resist ‘locking away their savings’ and tend to favour certain investments like Isas over others. To make pensions more appropriate for the self-employed, a pension ‘sidecar’ should be explored, a pool of money made accessible at any age in times of need.
“I would urge the government to steer clear of a ‘one size fits all’ approach to pension saving for the self-employed.”
Chris Curry, director of the Pensions Policy Institute, says: “This research highlights the diversity that exists within the self-employed community, in terms of age, gender, industry, skill level, earnings, working patterns and expectations. By providing a stronger evidence base with which to better understand the variety of self-employed experiences and savings behaviour, this report is an important step along the way to improving retirement outcomes for the self-employed”
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