One proposed solution that has been explored in recent years, and was referred to by the APPG on Financial Resilience, is the sidecar model, which could solve some of the concerns self-employed people have at locking their money away.
The sidecar model aims to create a level of liquid savings, while maximising long-term savings by contributions being paid into a combined account structure.
It is structured across two or more pots; one being a liquid savings account, and the second a pension plan.
This model works by asking a person to choose a liquid savings target, and contributions are then allocated to this pot first and once the target is reached, contributions automatically move to the pension plan.
The liquid savings are available at any time when needed, and whenever the balance drops below their liquid savings target the contribution will start feeding into the liquid pot again to top it back up.
While this model has merit and some trials of the sidecar have successfully taken place by Nest over the years, there is no single silver bullet solution.
In recognition Nest therefore launched further pilots aimed at encouraging pension savings, which are set to report later in 2022, including:
- Nudging people to save at relevant moments, for example when they receive a large payment.
- Nudging people to save some of the difference between monthly income and expenditure in months when income is higher.
- Giving people the choice to connect different kinds of savings vehicles to save into for the future.
While exploring a wide array of options is a must for such a diverse workforce, the prospect of using the annual tax return provides the clearest opportunity to get more self-employed people saving in pensions.
However, rather than auto-enrol, which risks deterring many of the self-employed, it would be sensible to adopt another behavioural science approach and provide a strong incentive or ‘nudge’ towards pension saving, perhaps by offering the ability to nominate a pension arrangement in conjunction with a tax break.
This could be an existing arrangement; one they have chosen to use, or pointed towards a guided shortlist of suitable schemes.
Making tax digital may also have a key role to play. HMRC’s Making Tax Digital plans involve encouraging small businesses and the self-employed to complete digital tax records and returns, with the eventual aim of going completely paperless.
With the launch of Making Tax Digital for Income Tax in April 2024 for self-employed people, there is an opportunity to use key contact points in such software to provide a stronger nudge to pension savings using behavioural prompts with a reminder of the tax relief on contributions.
Ultimately, progress in this area will take time and there remains a considerable self-employed pension gap in the meantime.