Self-employed people should not be auto enrolled into pensions like other workers because most would spurn the opportunity, according to a new report.
Only a third of people who work for themselves said they would stay enrolled, while a quarter would quit the pension and the rest don’t know, a survey by a trade body found.
A ‘sidecar’ pension scheme allowing people to build up a rainy day fund alongside a pension would be more likely to attract the self-employed, it said.
Saving for retirement: Self-employed people would resist being auto enrolled into pensions, unlike workers who overwhelming stay opted in, reckons a report
Just 31 per cent of the 4.8million Britons who are self-employed have a pension at present, although 67 per cent of those surveyed said they were concerned about saving for later life.
A free mid-life ‘finance MOT,’ better Government pension help for the self-employed, and more user-friendly and engaging products, were other ideas floated to help the self-employed save for old age.
But auto enrolment is not a viable option for the self-employed, even though it was successful for boosting pension saving among workers, says the Association of Independent Professionals and the Self-Employed (IPSE).
They are ambivalent because it would reduce their financial flexibility and control over their own cash, it reckons.
Last year the Government announced proposals to extend auto-enrolment to 18 to 22-year-olds and low earners, and explore ways of encouraging the self-employed to save for retirement, but postponed any changes until the mid 2020s.
This bypassed a Conservative manifesto commitment to bring the self-employed into the auto-enrolment net, although the Government said it would look at ways in which technology could be used to encourage them to increase their pension saving.
What should the self-employed do about a pension?
People going into business for themselves could keep on saving into their old workplace pension if they already have one, says Kate Smith, head of pensions at financial firm Aegon.
She runs through the main options for the self-employed here.
This is Money’s pensions columnist, Steve Webb, answered a reader question from a business owner who needed to set up a pension from scratch here.
The announcement also ducked previous suggestions that the Government could use the tax system to auto-enrol people who don’t have an employer into pension schemes.
Meanwhile, a ‘sidecar’ pension saving plan is already being developed by NEST, the state-run auto-enrolment scheme, although it is still in the early stages.
The idea is to allow people to build up an emergency savings fund alongside a pension, but after this had hit a certain level all contributions would be diverted into the pension.
People who might not otherwise save would therefore be helped to do so, without them running the risk of an unexpected bill sending them into debt.
But such a scheme would have to deal with practicalities like pension tax relief from the Government – top-ups to your pot paid at your income tax rate of 20 per cent, 40 per cent or 45 per cent – only being available for pensions, not short-term savings.
IPSE suggested such tax incentives should be promoted better since many are unaware of them, and that they should be tilted towards lower earners rather giving more tax relief the more you earn.
Many pension experts support creating a flat rate of pension tax relief, or finding another method of giving a bigger share to lower earners.
However, critics of the idea contend that higher earners get more tax relief because they pay higher contributions, and that such a change would abolish for good the historical principle that the money that you put towards old age saving is not taxed no matter how much you earn.
Jonathan Lima-Matthews, IPSE’s senior policy adviser, said: ‘With just 31 per cent of the self-employed saving into a pension, we must take urgent action to avert a looming crisis.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
‘Self-employment is a progressive way of working, but unfortunately current pension provisions simply do not cater to their needs.
‘While auto enrolment has been a successful policy for boosting the number of employees paying into a pension, our research found it’s simply not a viable savings solution for the self-employed.
There is no employer to enrol them, and it also reduces their ability to be flexible and in control of their money – two of the fundamental attractions of self-employment.
‘The recent growth in self-employment has been a revelation, but now we need a revolution to provide them long-term financial security and alleviate this ticking timebomb.
‘There is a real opportunity for both Government and the pensions industry to avert this crisis by developing feasible and forward-thinking solutions to give long-term peace of mind to the burgeoning self-employed workforce.’
IPSE is a body that represents the self-employed, including freelancers, contractors, consultants and independent professionals.
It surveyed more than 1,000 self-employed people and carried out research with the pensions industry, think tanks and the Government to draw up its report.
Will Sandbrook, executive director of NEST Insight, said: ‘We’re excited to be launching our sidecar savings trial later this year, working closely with the Money Advice Service and academics from Harvard University, and we’ll be announcing further details in the coming months.
‘The current sidecar savings research trial is specifically focused on the workplace. The two-year project will explore whether an appropriate balance of liquidity can enhance people’s overall financial wellbeing, both in the short term and through into retirement.
‘Research does suggest that the illiquidity of pensions may be a barrier to take up among the self-employed, and as part of our broader research programme we’re keen to look into that further.
‘One avenue is to explore whether alternative savings models beyond a traditional pension can help increase overall savings in this group. The sidecar model or something like it could indeed be one version of this but it may work a bit differently than it does in the workplace.’
TOP SIPPS FOR DIY PENSION INVESTORS