55% of self employed will have no private pension savings at retirement if trends continue

A new study by the Institute of Fiscal Studies (IFS) reveals a startling difference in pension saving patterns between the self employed and employees.

The influential think tank has made two proposals to the government to encourage the self-employed to save more, including some type of auto-enrolment into a pension scheme or lifetime ISA that would be implemented at the self-assessment time.

Most self employed people have no private pension provision

80% of employees earning £10,000 or more contribute to a pension scheme, thanks to the successful rollout of auto-enrolment, which rolled out over several years from 2012 onwards.

The self-employed, on the other hand, who make up over 12% of the workforce, have seen their numbers plummet from around 60% contributing in the 1990s to a mere 20% today.

If current trends continue, the report estimates that 55% of self-employed people will have no private pension provision when they retire.

The self employed save in other ways too

The IFS report suggests that other factors must be taken into account before assumptions about the comparative financial health of individuals who work for themselves are made.

As with other aspects of life, the self-employed save and invest differently from their employee counterparts.

Many self-employed workers have private pensions from previous employment, save in other forms of wealth, or are married to or cohabiting with someone who does have a workplace pension.

Interestingly, the IFS also suggests that the self-employed are relatively better off than they were a decade ago because of the introduction of the new state pension in 2016.

Others might know that the UK has one of the least generous state pensions in the developed world!

Pension savings status quo ‘no longer fit for purpose’ – government urged to act

The IFS argues that without new measures, between 20% and 33% of the self-employed may not have sufficient funds when they retire.

The numbers are worse for the young, with a mere fifth of 25-34-year-olds currently set to have saved enough for a comfortable retirement if pension savings trends continue.

…the status quo, in which self-employed people have to arrange their own pension plans without assistance, is no longer fit for purpose, particularly given the effort the state has put into making pension saving easy for employees…

‘Active choice’ or automatic pension plan enrolment on the cards

The think tank has made two suggestions to the government to encourage self-employed people to contribute more to private pensions.

1. Self-employed to make an ‘active choice’ about the level of pension savings they make at self-assessment time – with zero being an option (similar to the employee ‘opt-out’). The contributions would go into a nominated pension plan, a default government-selected plan, or a Lifetime ISA.
2. Some kind of automatic enrolment—again operated via the self-assessment process—would automatically enrol the self-employed in either a private pension or Lifetime ISA. Again, individuals would be able to opt out if they want to. The IFS suggests that contributions could be calculated in a similar way to employees’ but starting at a lower level.

Further reading

• You can read the full IFS report here.
• Read our handy guide – how pensions work for sole traders.