How to help the self-employed boost their pension savings

The challenge faced is not insignificant and will still take some time yet to solve – if indeed it ever truly is.

In December 2018 the government set out a plan to build an evidence base to inform their policy response.

Research showed that flexibility and control are key factors in the types of products the self-employed use.

Unlike the approach for employees, the government set out to test a range of behavioural messages and tech tools that aimed to prompt self-employed individuals to save into a pension.

Following the success of auto-enrolment there is, however, a general acceptance that participation in pensions on a purely voluntary basis is unlikely to work and messaging on its own will only have marginal benefits.

This is especially true for the self-employed whose unifying concern across all groups was that the potential volatility of their income was a material barrier to saving into a long-term savings vehicle such as a pension.

Sidecar model

The Nest Insight programme with the DWP found a high proportion of the self-employed expressed a willingness to save for retirement and 55 per cent said they would welcome help or guidance on how best to do so.

However, findings from their quantitative research showed that flexibility and control are key factors in the types of products they use, with 50 per cent saving into an instant access account and 37 per cent into a cash Isa – though not necessarily for retirement purposes.

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.

While this model has merit and some trials of the sidecar have successfully taken place, there is no single silver bullet solution.

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.