Self-employed should have pension contributions added to tax bill

5 July 2017

Self-employed workers should have pension contributions added to their tax bill once a year as part of the self-assessment process, according to a new report from Royal London and Aviva.

They believe the move would encourage people that run their own business, who currently miss out on workplace pensions, to build a pot of savings for retirement.

The two insurers, who teamed up to produce the proposal, suggest an initial contribution figure of 4% of their taxable profits, which once topped up by basic rate tax relief would result in a total contribution of 5%.

As contributions are based on percentages, contributions would not be fixed and would rise and fall in line with the fortunes of the business.  

Self-employed workers would not be forced to contribute and like members of auto-enrolled workplace pensions, would have the right to opt out if they so wished.

According to their “Solving the under-saving problem among the self-employed” report, in 2014/15 just one in seven self-employed workers were paying into a private pension, leaving them reliant on the state pension and any other savings or investments they have managed to accrue.

However, following the successful roll out of auto-enrolment in the workplace, momentum is growing to tackle the problem is growing. The government has scheduled a review of auto-enrolment for this year and in its manifesto, the Conservatives pledged to broaden the scheme to include the self-employed.

15% of working population are self-employed

There are currently 4.8 million self-employed workers in the UK according to the report, amounting to roughly 15% of the total working population. Self-employed men more likely to pay into a pension at 15.9%, compared to 8.9% of women. Unsurprisingly, rates of saving were also lower among younger workers with levels of pension saving increasing as they age. Only 10.5% of self-employed people aged between 35 and 44 saved into a pension but this shot up to 19.6% for those aged between 45 and 54 and to 23% for those aged between 60 and 64.

The report also considers other options including opt-ins on tax returns, the government matching pension contributions (in lieu of an employer), and using the Lifetime Isa but concludes that auto-enrolment via the tax return is the most appropriate solution.

Steve Webb, director of policy at Royal London says: “Automatic enrolment has shown the power of ‘nudges’ to get people saving. Using the annual tax return process to ‘nudge’ self-employed people into starting saving for their retirement could bring a breakthrough in pension coverage for the self-employed in the same way as has already happened for employees. It is vital that we build on the momentum for action in this area and take forward practical proposals as a matter of urgency.”

John Lawson, head of policy at Aviva agrees: “The lack of retirement provision amongst the self-employed is reaching crisis levels. Whilst automatic enrolment has helped to reverse declining participation amongst employees, the situation for self-employed workers remains dire. Many will simply be unable to afford to retire unless urgent action is taken.”

‘Recommendations need to go one step further’

But Nathan Long, senior pension analyst at investment platform Hargreaves Lansdown, doesn’t believe the report goes far enough. He says: “Recommendations to deduct 4% of profits at the point of compiling a tax return and pay them to a pension provider of the persons choosing are sound, but will ultimately fail. Auto-enrolment has been a success so far because no engagement is necessary, so the recommendations need to go one step further and have a default pension provider in place, and that should be NEST. However, personally engaging with retirement savings is crucial, so we would like the ability to choose your provider retained and the choice extended to employees too.

“The report also calls on the self-employed earning just over £8,000 to be enrolled, whereas the current earnings level for employees to automatically save for retirement is £10,000. There should be no discrepancy, but we believe this strengthens the argument to drop the entry point for employees to include more low-paid, part-time workers.”

Jon Greer, head of retirement policy at investment firm Old Mutual Wealth, adds: There are few common denominators unifying the self-employed, unlike their employed peers, who are all automatically connected to an employer payroll system, making it relatively easy to introduce a workplace savings system based on inertia.

“It means there is no obvious catch-all approach to extending auto-enrolment to the self-employed and the government will have to get creative with policy solutions. The power of inertia in auto-enrolment will not bring the same outcome for the self-employed as it has for employees, since their touch points with the financial system are different.”

Are you self-employed? If so, Moneywise would love to hear what you are doing to save for retirement. Please comment in the boxes below.


In reply to by anonymous_stub (not verified)

Just info

In reply to by anonymous_stub (not verified)

Nest. Minimum amount. Tried to collect Gold plated coins, but then realised they are worth pretty nothing.

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