PensionsMar 2 2023

Self-employed fail to boost pension contributions

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Self-employed fail to boost pension contributions
Pexels/Maitree Rimthong

Many of the self-employed who save into a private pension rarely change the cash contributions they make, according to research by the Institute for Fiscal Studies. 

Employees’ pension contributions tend to be set as a fraction of their earnings which means cash contributions rise with earnings. 

However, research by IFS, funded by the Nuffield Foundation, found that nearly half of self-employed individuals saving in two consecutive years stick with exactly the same amount, and 23 per cent are still saving the same cash-terms amount nine years later.

IFS said these findings are particularly worrying in the current high-inflation environment. 

Even with annual inflation at 2 per cent, the real value of contributions that are constant in cash terms would fall by nearly 20 per cent over a period of 10 years. 

However, with current high inflation rates, the real-terms fall is now far larger.

The challenge of pension contributions that remain flat in cash terms comes on top of the fact that less than 20 per cent of self-employed are saving in a private pension at all, compared with around 80 per cent of private sector employees. 

Heidi Karjalainen, a research economist at IFS and author of the report, said: “The very low level of private pension participation among the self-employed has, rightly, led to a huge amount of policy concern from the government. 

“But with so many self-employed savers’ pension contributions not rising in line with either inflation or earnings, it is clear that solving the problem of participation alone is not enough to ensure the adequacy of future pension incomes for self-employed workers.”

Other key findings included the fact that nearly a quarter of long-term self-employed workers choose the pension contribution amount as a monthly or annual ‘round number’ in nominal pound terms, for example, £10, £20, £50 or £100 per month.

The most common single amount among savers was £50 per month, which is £600 per year.

Those who save a ‘round number’ amount – presumably having set up a direct debit for that amount – are particularly likely to leave their cash-terms contributions unchanged over many years. 

Out of the ‘round number’ savers who are still saving a decade later, 60 per cent are saving the same cash amount. 

The research also found that while self-employed people earning between £10,000 and £20,000 per year have average pension contributions similar to those of employees with defined contribution schemes, for those earning above £20,000 per year the self-employed who save in a pension contribute substantially less than similarly paid employees.