The government should exploit the National Insurance system to get self-employed people saving into a workplace pension, former pensions minister Sir Steve Webb has said.
Sir Steve, who is director of policy at Royal London, said his proposal could get up to 2m self-employed people saving into a workplace pension who are not served by the current auto-enrolment regime.
He said auto-enrolment, which came in in 2012, had reversed 50 years of declining workplace membership.
But this reversal had not extended to the self-employed, of whom only one in seven were contributing to a pension according to figures from the Department for Work and Pensions.
“So six out of seven self-employed people didn’t put money into a pension last year,” he said.
“In the past you might have said, well, self-employed are just different. Perhaps their business is their pension. They’ll sell up their business and live off that. Or maybe they’ve got property.”
But he said the “new self-employed” were different.
“The average self-employed person is on a lower income than the average employed person. So what are we going to do about it?”
Revealed to an audience at the Trades Union Congress today (1 February), Sir Steve’s proposal would involve the government raising class four National Insurance contributions – which apply to self-employed people earning more than £8,060 a year – from 9 per cent to 12 per cent.
People would then be given the option of letting that extra 3 per cent go to Treasury, or allocating it to a personal pension scheme of their choice.
If they opted to channel it into a pension, they would only be able to access the money at retirement if they contributed an additional 5 per cent into that pension scheme.
That, Sir Steve said, would bring them in line with the 8 per cent minimum contribution rate that will apply to auto-enrolment schemes from 2019.
He said the Lifetime Isa was no solution, because it was only open to people under the age of 40, while most self-employed people were over the age of 40.
He pointed out that the majority of pilots of a “household name airline” were on contracts that treated them as self-employed.
“What that means is, when they got on the airline, if they want a coffee, they have to buy it from the airline. So what they do is they bring their own flasks on board.
“If the pilots of the airline you’ve flown with are not employed by the airline, the labour market is in a very strange place.”
Sir Steve said: “You’ll probably hate it [his solution], but unless you’ve got a better idea, I think we should do it. So that’s my challenge to you. If you don’t like this one, give me a better one.”
He said the government also needed to think about redefining the boundaries between employed and self-employed.