Improving pensions for the self-employed

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. 

One of the most alarming figures is that only 32 per cent of self-employees are currently saving into a private or workplace pension and other research indicates the proportion saving into pensions has declined sharply over the past 10 years.

This compares to a rise in employee participation, largely as a result of auto-enrolment, now sitting at 73 per cent. This means it is vital to make saving for retirement more attractive for the self-employed.

The special features of the self-employed population

The Ipsos Mori report segments self-employed individuals into five distinct groups, each exhibiting different characteristics which influence their propensity to increase participation in retirement savings: younger and unprepared; younger and capable; irregular earners; property endorsers; and pension endorsers. 

Unsurprisingly, the younger and unprepared segment contained the youngest and lowest qualified workers, with just 10 per cent of this group currently saving into a workplace or private pension as they struggle with low incomes and irregular cash flow, meaning that saving is simply not a priority.

Being able to access funds in emergencies is also particularly important for many self-employed.

The younger and capable bracket also contained young individuals, but in contrast, those in this group have more regular cash flows and higher incomes. However, this group is unlikely to prioritise pension saving as a result of limited understanding of pensions.

The irregular earner group faces a number of barriers to saving, including low incomes and a focus on making ends meet and short-term financial planning. Those in this segment, while keen to save for the future, are put off pension saving due to the fact that funds are not easily accessible.

In contrast, the property endorsers tended to contain older individuals with higher incomes and qualifications and, while confident in their knowledge of pensions and saving for retirement, they are more likely to invest in property, believing that bricks and mortar offer better rewards compared to pensions.

The pension endorsers’ bracket contains confident individuals that are higher earners with regular incomes. This group is the most likely to be saving into a pension and acknowledge the benefits of doing so.