'Auto-enrolment won't solve self-employed pensions time bomb'

Published by Rachel Lacey on 26 June 2018.
Last updated on 26 June 2018


Auto-enrolment is not the solution to the self-employed pensions crisis, according to a landmark report from the IPSE (the association of Independent Professionals and the Self-Employed).

Its report ‘How to solve the self-employed pensions crisis’ found that just under a third (31%) of the UK’s 4.8 million self-employed currently pay into a pension, with over two thirds (67%) worried about the amounts they are saving for their future.

Under auto-enrolment, all eligible employees are signed up to their workplace pensions. Contributions are automatically deducted from their salary and are topped up by an employer contribution and tax relief unless they opt out of the scheme.

The initiative has seen around 10 million employed workers start saving for retirement, but despite calls on the government to extend the scheme to the self-employed, IPSE does not believe it would be effective for those that work for themselves.

According to its research, just over a third (36%) of self-employed would remain ‘opted in’ while as many as a quarter (25%) would quit the scheme. Nearly four in 10 (38%) do not know what they would do.

Commenting on the findings, Jonathan Lima-Matthews, senior policy adviser at IPSE says: With just 31% of the self-employed saving into a pension, we must take urgent action to avert a looming crisis. Self-employment is a progressive way of working, but unfortunately current pension provisions simply do not cater to their needs.

“While auto-enrolment has been a successful policy for boosting the number of employees paying into a pension, our research found it’s simply not a viable savings solution for the self-employed. There is no employer to enrol them, and it also reduces their ability to be flexible and in control of their money – two of the fundamental attractions of self-employment.”

In order to tackle what it describes as a “ticking time bomb”, IPSE has made a number of recommendations, including a so-called ‘side car’ savings scheme that would enable the self-employed to put away money for retirement but maintain a rainy-day fund for cash emergencies.

With more than half (51%) of self-employed people trusting government websites, it also wants to see the new financial guidance body - which will bring together the Money Advice Service, Pensions Wise and The Pensions Advisory Service - provide tailored savings advice for the self-employed.

Older self-employed people should get a mid-life ‘financial MOT’ with specialist advisers while schools, universities and pension providers should work together to teach young people about financial education and the importance of retirement saving.

A one-size fits all approach won’t work

Tom McPhail, head of policy at financial provider Hargreaves Lansdown says that the report provides a “sensible and balanced package of proposals” that recognises a one-size fits all solution won’t work.

He says: “The report brings together solutions such as the sidecar account, financial guidance and education, better engagement from pension providers and the mid-life financial MOT, all of which should be developed as quickly as possible.

“The one measure we think should be added to this list, is the right for individuals to ask employers to pay pension contributions into a pension of their own choice. This would strengthen individuals’ relationship with their retirement savings and increase the likelihood of them continuing to save when moving between jobs or going self-employed. Most self-employed people start their working lives in employment, on average not making the switch to self-employment until the age of 32. So the self-employed challenge isn’t just a question of getting them into pensions; it’s more one of how we stop losing them when they transition from employment to self-employment.”

Kate Smith, head of pensions at provider Aegon, agrees that self-employed people should be able to carry on saving into previous workplace pensions. “With 44% of self-employed people aged between 50 and 65 it’s highly likely they will have been employed before and therefore have saved into one or more workplace pensions. These have the potential to offer the flexibility that the self-employed need.”

However, she disagrees that the principle of auto-enrolment for self-employed workers should be dismissed altogether, particularly given the ongoing modernisation of the tax payment system.

Ms Smith adds: “Unlike IPSE we believe that building on the nudge principles from auto-enrolment combined with HMRC’s initiative ‘making tax digital’ do have a role to play in building solutions for the self-employed. Paying tax more frequently could act as a prompt for people to consider their savings at the same time.”

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i've been self employed over

i've been self employed over 40 yrs, never taken out a private pension, didn't trust the spivs selling them, got into buy to let instead , no regrets, friends that did take out private pensions have been very disappointed with the out come, in fact i guy said he would have been better off putting the cash under his bed.