The Institute for Fiscal Studies has warned that nearly two million self-employed workers in the UK face an imminent pension crisis due to insufficient savings.
The latest report reveals that only 500,000 self-employed people earning more than £10,000 a year contribute to a pension, leaving 1.8 million people with no retirement savings.
This represents a significant fall in savings rates among the self-employed over the past 25 years. In 1998, nearly two-thirds of the self-employed were saving into a pension, whereas now the majority have never contributed to a pension. As a result, three-quarters of the self-employed are expected to retire on less than £15,000 a year, including their state pension, according to a joint report by the Institute for Fiscal Studies and the Fiscal Justice Trust in Aberdeen.
At current savings rates, 55% of self-employed people will not have a private pension at all when they retire. The report suggests that a self-employed person aged 25-34 can get back on track by saving 9% of their income each year, while those over 50 need to save 18% to achieve an adequate retirement income.
David Sturrock, an economist at the Institute for Fiscal Studies, urged the government to consider measures to encourage retirement saving among the self-employed, such as encouraging them to invest in a pension as part of the tax return process or automatically enrolling them in a pension plan unless they choose to withdraw.
“Policymakers have two main options for helping the self-employed save for retirement,” Sturrock said. “Both options are based on the fact that the self-employed have to file a tax return at the end of each year. The government could either make the self-employed make an active choice about whether to save into a pension or a lifetime savings account, or automatically enroll them in a long-term savings plan, which they can opt out of.”
The success of automatic enrolment for private sector employees, which has seen workplace pension participation rise from over 40% to over 85% since 2012, underscores the potential benefits of similar schemes for the self-employed, who are currently not covered by this system.
Mubin Haque, chief executive of the Aberdeen Financial Justice Trust, stressed the urgent need for government action, noting: “The self-employed make up a growing share of the UK workforce, but many are on the path to a poor retirement. More than half of them have no private pension savings. Auto-enrolment has been a huge change for employees, rapidly increasing the number of pension savers. We now need to use similar approaches for the self-employed to actively push them to think about their financial future.”
The report also recommends that the self-employed be encouraged to increase their pension contributions over time to keep pace with inflation. It suggests adjusting the default settings for direct debit contributions so that they automatically rise in line with the consumer price index, to ensure savings keep pace with inflation.
This approach would bring private pensions more in line with the state pension system, which benefits from a triple lock, which increases payments by the higher of inflation, or average wages, or 2.5%. The next increase in state pensions is expected to reflect wage growth, which is forecast at around 4.1%.
A Department for Work and Pensions spokesperson said: “We welcome this report and will carefully consider its findings and conclusions in connection with our review of the pensions landscape to improve retirement outcomes and investment in the UK economy.”
With the self-employed making up a growing segment of the UK workforce, there is increasing pressure on policymakers to address the pension gap and ensure better financial security for this group in retirement.
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