Retirement Income  

How to help the self-employed boost their pension savings

  • Explain the challenges for self-employed individuals and saving into a pension
  • Explain how auto-enrolment fits into the lifestyle of a self-employed individual
  • Identify the solutions suggested to help self-employed individuals save into a pension
How to help the self-employed boost their pension savings

Just prior to the pandemic the self-employed made up about one in seven of the workforce, and while that is likely to have dipped somewhat through the pandemic, this remains much larger than a generation ago, driven by growth in self-employment in the decade after the financial crisis.

Despite the growth in the number of people who are self-employed over the years, pension savings for this group have continued to fall.

A recent report from the Office for National Statistics paints a truly harrowing picture of the retirement outlook for a vast number of people.

Article continues after advert

Almost a third said they did not expect to have any pension provision beyond the state pension when they retire, and a particular lack was highlighted in those who are self-employed.

While it comes as little surprise that the self-employed generally have lower levels of pension savings, the more concerning issue is the fact that just 20 per cent of self-employed people said they were paying into a pension between April 2018 and March 2020, which shows just how dire the situation currently is.

Comparatively, 80 per cent of employees were paying into a pension – largely thanks to auto-enrolment, which the self-employed are unable to benefit from. This latest data does not yet cover the pandemic and it is likely that the results paint a more positive picture than would be the case had it been factored in.

Pension savings among the self-employed – or more specifically the lack thereof – has long been an issue.

The All Party Parliamentary Group on Financial Resilience’s recent report on people’s financial resilience during the pandemic highlights the lack of pension savings among the self-employed, and the cost of living crisis serves to further expose the risks of under-saving.

Most data that explore self-employed pension savings looks at them with the view that all self-employed people fit within one category. However, while they may all tick the self-employed box, this does not mean they are a homogenous group. In fact, they are far from it.

We understand from research we carried out with the Pensions Policy Institute in 2017 that the self-employed comprise a vast number of groups with differing characteristics, behaviours and savings levels.

The key findings found:

  • The self-employed appear to have overall total wealth equivalent to employed, though the sources of this wealth differ.
  • The self-employed are considerably less reliant on pensions, with just 28 per cent believing pensions are the safest way to save compared with 52 per cent of employees.
  • Seven per cent of the self-employed believe the largest part of their retirement income will come from their business.
  • The self-employed have a more positive perception of property than their employed peers, both in terms of its safety and its profitability – 53 per cent believe property will make the most of their money compared with 40 per cent of employees.

Additionally, we found that the self-employed mostly actively choose not to save in pensions.

Put simply, at one end of the scale they lack savings entirely – think gig workers – or they disproportionately hold short-term savings and property wealth – think entrepreneurs.

Getting into pensions

The real question is, if self-employed total overall wealth is similar to that of the employed, then why do they prefer other types of investments over pensions and what can we do about it?

A key practical issue is that unlike for employees, there is no employer to automatically enrol the self-employed into a pension.

Additionally, the success of auto-enrolment has a lot to do with the inertia element of behavioural economics to keep people in the scheme, in other words, trusting that most people simply will not get around to opting out.