The Pension Commission has been reformed to address pension inadequacy. While there are significant concerns over employees not having a large enough pension pot, the outlook for self-employed is even more stark.
According to the Institute for Fiscal Studies, around only one in five of self-employed now save into a private pension. This contrasts with 86% of employees now auto-enrolled.
In its recent pension review, the IFS said: “Most self-employed people are on track for an inadequate retirement if relying only on their own pension, although the picture is improved once we include incomes of partners, inheritances and other wealth.”
And the self-employed is a significant minority of the working population. There are around 4.2 million self-employed people in the UK, equivalent to 13% of total employment.
Who acts as the employer?
The collapse in the number of self-employed people contributing to a pension in contrast to the high numbers of employed people with a retirement plan underscores the efficacy of harnessing inertia through auto-enrolment.
But designing an auto-enrolment scheme for the self-employed is not straight forward – there is no employer to provide the scheme nor contributions.
To solve the self-employment crisis, a government institution would need to take on the role of the employer. The one authority which has a contact with every self-employed person is HMRC.
The IFS proposes the self-employed would be asked to make an active choice about pension contributions when filling out a self-assessment tax return. It’s far from clear, however, this would be effective.
Making an active choice flies in the face of the benefits of auto-enrolment. It is by harnessing inertia we have made significant change to millions of people’s retirement future.
The IFS also suggests self-employed people could be automatically enrolled either into a private pension or a Lifetime Isa.
While auto-enrolling people with the option to opt-out would be a more effective policy, a private pension is higher cost than an occupational pension scheme.
It would make more sense to auto-enrol the self-employed into Nest which was designed to be a low-cost, high-quality pension scheme for small companies.
But there is the danger that using HMRC to enrol the self-employed could be seen as another form of taxation and fuel resentment. The government would need to sweeten the deal either by pointing out the tax benefits of pensions contributions or by matching some of those contributions.
Incentives
In 2017 the former pensions minister Steve Webb suggested changing the Class IV national insurance contributions by the self-employed from 9% of applicable earnings to 12%, giving the self-employed the option to either pay those earnings into a pension or giving them to the Treasury.
As 3% of earnings will be insufficient to generate a decent pension, he suggested the self-employed would only be able to access the money at retirement if they contributed an additional 5% into that pension scheme.
Policy ideas exist for how the self-employed could have a brighter retirement future but, up until now, there has been a lack of urgency to solve this issue. Let’s hope the newly formed Pensions Commission provides the right impetus.