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Self-employed face pension crunch as saving rates dwindle

While employees have been forced into pensions through auto-enrolment, savings rates among the self-employed have dwindled.


by Michelle McGagh on Dec 11, 2015 at 08:00

Self-employed face pension crunch as saving rates dwindle

Workers have been nudged into pension saving through auto-enrolment but the self-employed are being left behind and need new incentives to save.

Under auto-enrolment, which automatically puts people into their workplace pension scheme, nine million employees will save for their retirement for the first time.

The low opt-out rate (workers are still given the option to leave the scheme but will be put back in every three years) means auto-enrolment has been a success but there is one group of people who are not benefitting: the self-employed.

Under the rules, there is no obligation for the self-employed to save. This problem is compounded by the fact that fewer self-employed workers are contributing to private pensions.

According to research by insurer Prudential, the number of self-employed workers contributing to a private pension has fallen to 420,000 despite record growth in the number of people working for themselves, to 4.6 million at the last count.

Just 9% of self-employed workers contribute to a pension, compared with 34% in 2001/02 and the total value of contributions from the self-employed has fallen from £2.5 billion to £1.6 billion over this time.

While they missed out on auto-enrolment, the self-employed will be given a boost by the introduction of the flat-rate state pension next April. Under the current system those who work for themselves can only claim a state pension of £107.45 a week because they pay the ‘wrong’ type of national insurance contributions (NICs) but under the reforms all NICs are equal and they will qualify for the £155-a-week flat rate as long as they have paid NICs (of any type) for 35 years.

However, £155-a-week is not enough for most people to live off and those working for themselves need to make provision for their old age.

Not enough incentives

Part of the reason the self-employed do not save enough for retirement is because they are not incentivised enough, argued Adrian Boulding, a pension expert at the Tax Incentivised Savings Association (Tisa).

While employees receive a top-up pension contribution from both the government in the form of tax relief and their employer, the self-employed only receive tax relief.

Under auto-enrolment, employees currently put in 1%, employers another 1% and the government pays in 0.2%, but this will rise to 8% in total in 2017 (made up of 4% employee contributions, 3% from the employer and 1% from tax relief.

Adrian Boulding, policy director at the Tax incentivised Savings Association (Tisa), has proposed the government offer a ‘pound-for-pound’ match for self-employed people saving into pensions.

He said incentivising in this way would ‘restore parity’ between employees and the self-employed, who not only miss out on employer pension contributions but do not receive the NI break that employers get when making a pension contribution for a worker.

‘What the Tisa findings suggest is that we should correct this with more generous matching... for every £1 a self-employed person pay in the govermnent pays in £1 and that would put them on the same level as employees,’ said Boulding.

However, he added that an upper savings limit would need to be introduced to limit the advantage of the incentive, which should only be offered to those paying 20% basic rate income tax.

‘You have [two types of self-employed workers]; the hardworking trades people who are probably basic rate taxpayers and then you have another set of self-employed that are expensive, up-market consultants and we do not propose that [the incentive] should be given to [them],’ said Boulding.

Tisa said the incentive would cost the government £600 million, which could be ‘cost neutral’ if salary sacrifice was scrapped. Salary sacrifice is where income tax is reduced by moving part of a salary into a pension as a benefit.

Boulding said salary sacrifice ‘looks and feels like tax avoidance and that is frowned upon’.

Compulsion on cards?

Fiona Tait, pension expert at Royal London, said self-employed people could be compelled to save into a pension.

‘Auto-enrolment works because it makes saving easier than not saving but you cannot do the same for the self-employed without making it compulsory on someone,’ she said, adding that auto-enrolment compelled the employer to offer a scheme even if it was not mandatory to save into it.

‘The big decision is whether to make it compulsory for the self-employed as part of the conditions of running your own business…but it brings up the issue of whether it is unfair because there is less individual choice.’

Tait said the government could look at profits of the business before a person was forced to save.

However, she added that making pension savings compulsory for self-employed may mean it had to be compulsory for everyone.

Boulding said compulsion was too much of a ‘blunt tool’ to use when encouraging saving.

‘For self-employed people… there will be lean years when they need to nurse and put money into the business rather than pension saving, and pension saving – quite rightly – may not be their top priority so compulsion isn’t the right answer,’ he said.

7 comments so far. Why not have your say?


Dec 11, 2015 at 18:50

I am 25 years I would like to retire at 60 on a £30,000 annual pension what size of pension pot would I require? and secondly to receive this how much should I put by each month?

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Dec 11, 2015 at 23:37

At 25 years I was in a job which was projected to pay an annual pension of £30,000 (provided I were to stay in it for enough years). It was one of the best final salary pension schemes available and was accessible to ordinary workers like me, not limited to high-flyers. Too many factors to mention have changed that.

In answer to your question, if you want income of £30,000 index-linked (I doubt that you would want it to be fixed at £30k for a potential retirement of 30+ years) you would need a pot of *approximately* £1,050,000 in today's money, that is £35,000 for every £1,000 of income.

I have no idea how much that figure would be in 35 years' time following further tinkering with the pension system, the effects of inflation and so on and I don't know how much you would need to put by each month. I would suggest, though, that you anticipate both lean years as well as fat years during your working life. It is highly likely that technological changes will affect your future workplaces. The good news is that you are thinking about it seriously now. Remember to keep a balance - it may not be totally wise to save everything for when you are too old and frail to enjoy it. Keep reviewing the situation as you go along and keep an open mind. That may involve continued study and setting up your own business so that you don't have to retire at 60. It could even be fun, organizing flotilla holidays or whatever turns you on. Another aspect is that by starting early, you can gain a lot in growth over the years.

Maybe I answered more than your question...

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alex lee

Dec 12, 2015 at 02:00

Let's face it the benefit is a tax break, unexpected windfall from the financial regulator. The risk over the term of the contract is being robbed by doggy financial advice, pension companies, the government and act of God.

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John Lacy

Dec 12, 2015 at 08:51

I think that this article misses the point completely. I'm self employed and owing to the recession my income has decreased by 40% between 2007 and now and I've had to stop contributing to my pension to survive. I don't think that this is uncommon.

However I'm still taxed so that civil servants, teachers et al can have their final salary pensions all of which are funded from tax revenue not from any pension fund. And don't give me the argument that they have to be compensated for having low wages--that's just a myth--on an hourly basis they are paid far more than most of the private sector and work far less hours.

If you want to kill the public sector pension gravy train or at least make them pay the commercial rate for what they're getting you'd probably be able to reduce the general tax rate considerably---that might just let me have enough income to pay in to a pension again.

Bitter at goernmental stupidity over decades!!!!

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Dec 12, 2015 at 10:47

This is probably because the are few advisers that can make traipsing round to people's houses to tell them to pay into a pension that can make it viable.

Commission on regular premiums is not a bad thing in my opinion.

Can you believe someone is suggesting the government give self employed people free money but not employed people. Whe is the fairness.

What has happened is financial advisers have been hung out to dry and now people are wondering why no one is willing to advise low value clients.

People in their 20s and 30s will be knackered when they get older unless they get an inheritance. How will many men and women work until age 68/70 in manual trades and so on? The state pension will also be much reduced - many retired people are now getting state pensions of c. £170-200pw. The flat rate will be less than that.

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Dec 12, 2015 at 13:53

The government are not interested in the self employed who will be putting money into their business so that it expands. The government does not really like this and if your business becomes your source of retirement money this is even worse and the taxman will take as much as possible when you sell your business. The young today should get a job inn the civil service get promoted by not having any real ideas and not being controversial make sure you keep your department producing paper even if nobody will read it then you will be able to retire without any worries knowing you have screwed the system and good luck

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Dec 12, 2015 at 22:58

The self employed usually want to put any spare money into the business so that it can expand and employ. They then hope to use the value of their business to fund their pension. The trouble is that the government tax it at that point which in my view is unreasonable as they will get 40% when you die. Governments should encourage business expansion instead of taxing hard the one section which keeps this country going

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