How can we ensure that our pensions system does not leave behind the self-employed?
Five years after the launch of auto-enrolment into workplace pensions, the scheme has proved more successful than most dared to hope: some 8.5m people have started saving into new workplace pensions and opt-out rates remain around 10% or lower.
With signs that long-term decline in workplace pension saving has been decisively reversed, attention is turning to those groups who are not eligible for auto-enrolment whether due to age restrictions, low wages or the fact that they have no employer. A million people have joined the ranks of the self-employed since 2008 and this group now numbers 4.7m – one-seventh of the workforce.
But evidence shows that the self-employed are much less likely to save into pensions than employees and there is growing concern that many of them will be left with too little to live on in retirement. Prospect brought together a panel of speakers at the Conservative conference in Manchester, in partnership with Old Mutual Wealth, to explore the issues around long-term saving for the self-employed and hear the findings of research carried out by the Pensions Policy Institute, entitled Policies for Increasing Long-Term Saving of the Self-Employed.
The research, carried out with support from Old Mutual Wealth, produced no evidence that self-employed people save less than those in employment, said Sarah Luheshi, Deputy Director, Pensions Policy Institute. “What’s different is the source of that saving. The self-employed are less reliant on a pension. Property forms the largest part of their expected source of income in retirement, and they do tend to have more than one.”
Only 12% of the self-employed were saving into a pension, said Steven Levin, Chief Executive of the UK Platform at Old Mutual Wealth, compared with 60% of those in employment and a recent YouGov survey suggested that those self-employed who did save into a pension put in 28% less.
The research did not identify firm reasons for these differences, but the panellists argued that they stemmed largely from the financial realities of self-employment. “This is a group of people for whom income flexibility is massively important,” said Levin. Irregular cash flow made it harder for them to commit to fixed monthly pension contributions, as well as raising obstacles to obtaining mortgages and other products. “There’s an element of these people being shut out of sections of the financial services market,” he said. As a probable consequence, those self-employed to did have pensions were around ten years behind their counterparts in employment in terms of the sum saved.
However, the research also suggested that attitudinal differences played a major role in determining how the self-employed chose to save: only 28% of self-employed believe pensions are the safest place to save for retirement, against 52% of people in employment.
“Is there something in the psyche of the self-employed that obstructs their path to setting up a pension for themselves?” asked Andy Chamberlain, Deputy Director of Policy at IPSE, the Association of Independent Professionals and the Self-Employed. “Does their mentality mean they’re less attracted to pensions and their providers than other people?” He believed this was the case and that it represented the central challenge for policymakers and pension providers.
Guy Opperman, Minister for Pensions and Financial Inclusion, reiterated the government’s manifesto commitment to extend auto-enrolment to cover the self-employed, with contributions calculated using tax returns, and said a decision on how to implement it was imminent. Other suggested mechanisms have included increasing Class Four National Insurance Contributions from 9% to 12% and putting the extra 3% of earnings into a pension, alongside a 5% contribution from the individual.
However, whichever route is chosen, extending auto-enrolment would capture only around 2m of the 4.7m self-employed, according to Luheshi. “Another 2m who would be exempt under the auto enrolment rules due to their age or the earnings threshold, and the remainder we just don’t have enough information about to be sure.”
The PPI report set out two further possibilities, she added. There was a possibility that older self-employed workers could continue contributing to a previous workplace pension, which could provide an option to about 500,000 people. About another 1m might be encouraged by a different kind of saving vehicle such as the Lifetime Isa, she said, although the PPI could not be sure about the extent of the overlaps between these groups.
“There isn’t one policy option that we could employ,” said Luheshi. “There are a number of different options that could appeal to different segments of the self-employed.”
Old Mutual Wealth welcomed the idea of extending auto-enrolment, said Levin. “But the implementation has to be very carefully considered. Current rules will capture only 2m out of 4.7m in that market and that’s not an effective enough solution.”
Several panellists backed the idea of a long-term savings vehicle with a “cash sidecar” – a separate fund into which the individual could deposit cash that could be accessed early as a “rainy day fund”. The extra flexibility this would offer might help attract self-employed people to use the product, although questions were raised about the attitude that HMRC would take to the sidecar arrangement.
Richard Graham, MP for Gloucester, supported efforts to provide more pension options for the self-employed and argued there was more work to do in understanding their attitudes and motivations.
“Are self-employed people really worried about the fact that they are effectively excluded from most of the auto enrolment process?” He believed this group was extremely self-reliant and likely to balk at the idea of asking someone else to manage a portion of their assets. “We need to know a lot more about what the self-employed actually think,” he argued.
With the support of Old Mutual Wealth, Prospect hosted a panel discussion at the 2017 Conservative Party Conference on what can be done to address the pension gap between the employed and the self-employed and what current pension and savings options are currently available.
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