How to help the self-employed plan for pensionhood

Therefore it was disappointing for many commentators that the Department for Work and Pensions' (DWP's) long-awaited review into auto-enrolment said it would not be bringing self-employed people into the automatic enrolment fold.

In the foreword to the 134-page review, Maintaining the Momentum, the former secretary of state for pensions, David Gauke, wrote: "We know there is more to do to ensure that younger people, part-time workers and the self-employed can achieve more security in later life.

"As per our manifesto commitment on the self-employed, the government's aim is to use the principles and learning of automatic enrolment to improve pension participation and retirement outcomes among self-employed people."

Yet later on in the study, the report stated: "There is no straightforward single mechanism, supported by evidence from trials or operations in other jurisdictions, to bring self-employed individuals into pension saving.

"Furthermore, evidence shows that not all self-employed individuals need help to save."

Some commentators expressed disappointment the government did not outline a solution or measures to bring self-employed people into auto-enrolment.

It's relatively easy for employed people to start saving, because the employer selects the scheme and organises payroll deductions. Chris Daems

Jamie Clark, pensions expert for Royal London, opines: "The government's ambition to maintain momentum on auto-enrolment risks being derailed for the millions of self-employed people for whom pension saving still remains a myth.

"Action is needed now to tackle the under-saving among this group. Every year of delay pushes the self-employed further away from a comfortable retirement."

Jon Greer, head of retirement policy at Old Mutual Wealth, says: "For this review, the government had continually committed to address this omission. Guy Opperman, minister for pensions and financial inclusion, went so far as saying 'there is no doubt' the self-employed would be included in auto-enrolment."

While they expressed their disappointment, many commentators also acknowledged the difficulty of bringing the 4.8m and rising self-employed Britons into auto-enrolment in its current form.

Vince Smith-Hughes, head of business development for Prudential, explains: "The situation for self-employed people is more complicated regarding auto-enrolment, in part because they are not a homogenous group.

"A solution is needed to avoid a two-tier retirement situation, arsing where employed people are auto-enrolled and self-employed people are not."

Hurdles to overcome

In the first instance, according to Mr Greer, even if the auto-enrolment earnings trigger had been applied to the self-employed, it would only have captured approximately 2m.

Changes in the review included the lowering of the age at which workers will be brought into auto-enrolment, from 22 down to 18 and allowing contributions from the first pound earned, rather than the lower earnings limit of £5,876.

This was to bring more people into the scope of auto-enrolment.

However, this does not go far enough, as Mr Greer says: "Even with the proposed shifts in age thresholds and earnings bands, there will still remain a large part of the population that will not be captured."

A large-scale study carried out last year by the Pensions Policy Institute on behalf of Old Mutual Wealth, Policies for Increasing Long-term Saving of the Self-employed, outlines how self-employed people tend to start saving into a pension at least 10 years later than employed workers. 

This means they could miss out on significant savings that would accrue from compound interest, which sees the value of savings rise over time.

Example: 

• The median pension wealth for a self-employed person approaching retirement (aged 60-64) is £53,000.
• An employee may have expected to accrue this pension wealth 10 years earlier (median pension wealth of employees 50-54 is £54,000).
• A self-employed individual aged 45-49 has a median pension wealth of £11,000, which an employee can expect to have accrued by their late 30s (median pension wealth of employees is £11,000 at age 35-39).
• An individual that saved £1,000 a year from age 35, retiring at age 65 would be £16,688 better off overall than if they had started paying in 10 years later age 45.

“The industry and advisers need to consider why the self-employed aren’t saving into pensions and why they delay saving," says Mr Greer. "This can help them find savings routes that work for this group.

"Current pension products are inflexible and this group, unlike the employed, often suffer from huge swings in their income."

According to Chris Daems, director of Cervello Financial Planning, a form of auto-enrolment would help the self employed but it would need a lot of thinking around how contributions would be taken.

"It would need to incorporate rules that take into account the flow of cash for the self employed tends to be different when compared to those who are employed."

The irregularity of income can be a challenge for the self-employed when it comes to committing to save a regular amount. Mr Smith-Hughes adds: "It's relatively easy for employed people to start saving, because the employer selects the scheme and organises payroll deductions.

"However, the self-employed get none of these advantages, and it is difficult to envisage a scenario where self-employed enrolment in a scheme is as simple as it is for employed people."

Also, it is hard to create a process like auto-enrolment for the self-employed, as the process for traditional workers is reliant on non-defaults out of a scheme, rather than opting-in, as a self-employed scheme would have to be.

However, as Mr Daems adds: "What would be helpful, and something that could be done with little effort is a charge cap, similar to the one imposed on auto-enrolment schemes, to start to overcome the 'pensions are too expensive' argument we hear regularly."

Isas and other forms of saving

One proposal outlined in the review was to reform the Lifetime Isa to allow greater flexibility so the self-employed could use this as a savings vehicle. 

Suggestions were made to cap the penalty for early withdrawals (unless one is buying a first home) and enable individuals to withdraw small amounts while keeping their bonus, on the condition the money is repaid within a short time frame.

Scrapping the upper age limit (40) was also suggested. But this was dismissed, as the point of the Lifetime Isa was to help the younger members of society in particular. And there are other Isa products open to older savers.

For Adrian Boulding, head of retirement strategy for Dunstan Thomas, a Flexible Isa would be a good option. 

"The key question for the self-employed", he says, "is which vehicle to save into. Pensions, Isas and Lifetime Isas (age limit permitting) all have their attractions.

"More providers should offer the Flexible Isa, allowing customers to take money out and put it back in again without using up any of the £20,000 annual Isa allowance."

He says this would be particularly useful for the self-employed, with their irregular cash flows, as they may need to dip temporarily into their savings to pre-pay for materials for a job they have secured, or boost their cashflow should work temporarily dry up.

Other measures 

Nest (the National Employment Savings Trust), is working with Britain Thinks and the Royal Society for the Encouragement of the Arts, Manufactures and Commerce (RSA) to review the evidence around retirement saving for the self-employed. 

According to Will Sandbrook, executive director of Nest Insight, they "hope to develop trials testing solutions later this year".

He comments: "Any solution for the self-employed needs to fit naturally within their everyday lives. Any practical solution must therefore be easy to use, requiring minimal time and effort."

Solutions could involve, therefore, considering alternative behavioural techniques (other than the inertia which works well in workplace schemes), and incentives to encourage the self-employed to start saving more.

It is all too easy for them to put it off until a later time, when they feel their business is stronger financially. Rachel Vahey

Another measure being considered is, according to Old Mutual's Mr Greer, a form of "pension side-car".

He outlines: "We strongly urge the government to consider a pension 'side car' - a pool of money made accessible at any age in times of need.

"This model is starting to be trialled by Nest in 2018 and the government should keep an eye on the output."

Using existing processes such as HM Revenue & Custom's self-assessment for tax might also be a starting point, especially as the government implements its Making Tax Digital agenda. 

This could open up possibilities in the form of the use and integration of software that self-employed individuals use to complete tax returns or accounts.

One way could be to allow self-employed people to default their national insurance contributions to a nominated pension.

Mr Smith-Hughes opines: "Finding a way to operate automatic enrolment for the self-employed, probably via the self-assessment system, would potentially be a good solution. 

"This will require additional thought to ensure it provides suitable encouragement, without being seen as an unwelcome burden on the self-employed, and that it can operate as simply as possible without creating additional complexity."

Mr Greer does believe there needs to be a nudge in terms of the policy reframing the government is having to do. He comments: "The interventions that will be announced will need to nudge the self-employed into pension saving, for example, auto-defaulting into a pension scheme through the self-assessment return.

"Without such a nudge it is unlikely that pension savings rates for the self-employed will increase."

Education

For Baroness Ros Altmann, former pensions minister, government and industry need to work harder, together, to communicate the benefits of pension saving and help to educate people on why saving for retirement is important.

She says: "The industry needs to up its game in terms of customer service and marketing. If people felt better about pensions, understood them more and wanted to invest, then the industry would get more money without having to rely on the government or other agents to bring their customers in.

"Making pensions more user-friendly is long overdue."

Ms Altmann highlights some ways to communicate pension benefits and educate people in the info box below. 

Rachel Vahey, product technical manager for Nucleus, states: "The number of self-employed people saving is falling and we need to turn this around.

"It is important to explore all the ways we can encourage this group to start saving, and to save more. This is all about getting people starting to save, and keeping them saving. It is all too easy for them to put it off until a later time, when they feel their business is stronger financially."

Education and clear, simple nudges should go a long way to helping the government in its pilot projects later this year. 

Developments in financial technology within the industry generally may make it easier to reach out to the self-employed. Ferdinand Lovett

Mr Daems comments: "Education certainly plays a part in helping the self employed understand the benefits of pensions, and we need to do what we can to shake off the way many people see pensions."

He says this could be done in collaboration with trade bodies representing the self employed, or with government support.

"With the self-employed population rapidly growing, and set to outstrip the number of public sector workers by 2020, it is admirable the government is tackling the issue," Mr Greer adds.

Direction of travel

However, although the recent review stopped short of bringing self-employed people within the existing auto-enrolment framework, or making firm suggestions about how to improve their pension savings, there is some positive movement that reflects the different behaviours at play.

This is the view of Angie Kirkwood, senior policy manager at Scottish Widows. "There is an indication of the direction of travel. For the employed, policy makers can use a combination of incentive and inertia. 

"For the self-employed, there are no employer contributions and it is much trickier to make saving the default option. So, for this group, the strategy appears to be more focused on behavioural nudges and convenience."

She points to the work being done by the DWP, the HMRC and the Treasury to test ways to make it easier and more convenient for self-employed people to save towards retirement. 

According to Ferdinand Lovett, associate director at law firm Sackers, "nudge is the watchword for government policy". He says: "It is interesting to see the review considers the digitisation of the tax system as an opportunity to influence the behaviour of the self-employed.

"In a similar way, I cannot help thinking that developments in financial technology within the industry generally, may make it easier to reach out to the self-employed, with platforms with pension savings that are more accessible and easier to integrate into daily money management."

Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association, is optimistic the ongoing work and trials proposed in the auto-enrolment review, in connection with various industry bodies, will help provide a solution to getting more self-employed people saving into a pension.

He says: "It is vitally important we tackle this challenge before it becomes even more serious. The review appears to recognise the complexity of this issue and we feel that pilot projects with the self-employed are the right way forward."

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