The self-employed may soon be incentivised to save for retirement in the same way as employed workers, the new pensions minister has indicated.
In an interview with the Financial Times, Richard Harrington said that the needs of people that work for themselves should be considered as part of an overall review of auto-enrolment next year.
Currently, auto-enrolment forces employers to pay into pensions on behalf of their staff and although they do have the choice of whether or not they pay in, they have to opt out rather than opt in. Following the introduction of the scheme, which started being phased in from October 2012, some 6.7 million workers have been auto-enrolled. For more details, read the Moneywise guide to auto-enrolment.
However, there are no such incentives for 4.8 million self-employed people in the UK who are not saving enough for retirement.
Research amongst 30-45 year olds from Old Mutual revealed that just 50% of self-employed people have personal pension, compared to 86% of employees. The self-employed are also saving less – putting away an average £290 a month, compared to £400 for those who are employed.
Most self-employed people say that they reason they don’t save is because they can’t afford it, and with figures from The Resolution Foundation suggesting a 45% increase in the number of people working for themselves since 2001/02, it’s a problem that is only set to get worse.
“Self-employed workers need incentives to pay in”
Jon Greer, pensions expert at Old Mutual Wealth says: “The rapidly growing self-employed population aren’t saving enough for retirement and are sleepwalking towards poverty in later life. The government needs to step in and help. Ahead of the Conservative party conference in October Theresa May ordered a review of employment regulation and practices, but action is also needed.
“In an ideal world everyone would be auto-enrolled so it is encouraging that the Pensions Minister has said he will see if it is possible to find a mechanism to bring the self-employed into automatic enrolment, but it is unlikely that that will be a quick and easy thing to do.”
David Newman, head of pensions at Close Brothers Asset Management agrees. “The logistics of implementation will be challenging, and needs to be as simple as possible. Self-employed individuals will not possess anything like the HR and payroll support larger companies could depend on when auto-enrolling their staff. On top of this, day-to-day business activity, let alone annual tax planning, frequently takes precedence over longer-term concerns. However, this is exactly why intervention is necessary,” he says.
The government will also need to consider the best ways to encourage these workers to save. Martin Palmer, head of corporate fund propositions at Zurich adds: “A key challenge will be to ensure that self-employed workers are given sufficient incentives to encourage them to pay in, as they will not benefit from an employer’s contribution. One way of achieving this would be to provide them with an element of National Insurance Contribution relief on pension contributions.”