The self-employed should be encouraged to save into their pensions using an opt-out system like the one on restaurant service charges, according to Aviva and Royal London.
In a report exploring how automatic enrolment could be extend to the self-employed the favoured solution by Aviva and Royal London is to use the annual self-assessment process to default the self-employed into pension saving.
As part of completing an annual tax return, Royal London and Aviva propose self-employed people could nominate a pension provider or scheme to receive any contributions and would have a sum automatically added to their total tax bill, perhaps equal to 4 per cent of their taxable profits.
With standard rate tax relief this would mean 5 per cent of profits would go into a pension unless the self-employed person actively opted out.
The fact that the contribution would go up and down in line with the ups and downs of the self-employed person’s business would provide a flexibility which would be welcomed by many self-employed people, according to the two providers.
John Lawson, head of policy at Aviva, said the “situation for self-employed workers remains dire” and that many will simply be unable to afford to retire unless urgent action is taken.”
Steve Webb, former pensions minister and now director of policy at Royal London, said that the solution proposed would use the power of ‘nudges’ to get the self-employed saving.
He said: “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.”
The report estimated that a system like this could lead to up to two million more self-employed people starting to save for their later life.
At present, while the number of self-employed is growing, they are not caught by the pension automatic enrolment movement, which has increased the number of employees who save into a pension.
However, financial adviser Sean Irwin, from DFP Wealth Management in Plymouth, said that although pensions for the self-employed is a “massive issue” he does not believe that a gratuity style system using the tax return is the best solution.
“People have different circumstances and this may not be appropriate for those starting a business,” he said. “However, it is certainly true that an awareness campaign is needed to try to persuade the self-employed to save for their futures.”
Minesh Patel, director of London-based adviser EA Financial Solutions, said that he thought it was a “great idea”.
However, he added that the self-employed were more likely to opt-out of pension top-ups than employees.
He said: “That is partly because they tend to wait until business is going well, and that might just not happen given the way the economy is going.
“The trick with pension saving is to do it steady and early, not to make large and late contributions, which is what the self-employed tend to do.”
rosie.murray-west@ft.com
