Improving pensions for the self-employed

  • List the challenges faced by the self-employed in saving into a pension and the employment landscape in general.
  • Describe what the DWP trials are looking at in regards to self-employed pensions.
  • Identify possible solutions to saving for retirement among self-employed.
Improving pensions for the self-employed

Just before Christmas, the Department for Work and Pensions unveiled a series of trials looking into how to encourage the self-employed to make greater pension provision.

This followed a report, commissioned by HM Revenue & Customs, from Ipsos Mori, called, The drivers of savings behaviour for retirement amongst the self-employed. 

The self-employed are a key and growing part of our employment landscape, but unlike employees they are not benefitting from being automatically enrolled into workplace pensions with an employer contribution.

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The government recognises the diverse nature of the self-employed population so, while seeking to learn from automatic enrolment, it is looking at tailored and largely voluntary solutions to get more self-employed people saving for retirement, ideally from younger ages.

Otherwise, they could become second class pension citizens, relying solely on the state pension. 

This article looks at the background to the challenges of pensions for the self-employed; the specific features of this sector of the employment landscape; what the trials will look at; and possible solutions to make saving for retirement among the self-employed ‘usual practice’, if not ‘automatic’.

Whatever the outcome of the trials, it is recognised there’s a growing population not doing enough for their retirement, presenting huge opportunities to offer professional financial advice.

The wider environment

The world of work is changing and the government recently announced new measures to improve workers’ rights to reflect this, including clarifying the distinction between employed and self-employed.

From April 2020, contractors working for larger private sector employers will be treated as employees. Hopefully, this will include being automatically enrolled into the employer’s workplace pension.

Since being introduced in 2012, auto-enrolment has transformed workplace pensions, with close to 10m employees having been auto-enrolled, all with employer contribution.

From April 2019, the combined employer/employee contribution rate rises to 8 per cent of band earnings and while unlikely to provide a particularly comfortable retirement for most, it is a great start on top of the state pension. Further enhancements are planned, but not until the mid-2020s.

Much of the success of auto-enrolment is is the ‘auto’ element. It relies on the employer setting up a workplace pension scheme, with eligible employees put into it automatically.

Unless employees actively opt out, they are saving for their retirement. But the self-employed do not have a separate employer to do this to them or for them. 

The potential for the self-employed to be left behind regarding pensions is a growing issue. The number of self-employed workers has risen sharply in recent years, sitting at 4.8m in the third quarter of 2017, or around 15 per cent of the workforce - a huge increase on the 3.8m in 2008.

We are also seeing a rapid expansion of those working in the ‘gig economy’ which, while different from traditional self-employment, shares a lack of default pension provision.