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Five reasons there is a self-employed pension crisis

The self-employed are not saving enough into their pensions, and this can be an opportunity for advisers

Under-accumulation is still the biggest issue affecting our retirement prosperity and while auto-enrolment will go a long way towards tackling that, it still comes up short.

One of the main groups disenfranchised under auto-enrolment is the self-employed.

The government is likely to introduce a form of automatic pension saving for the self-employed workforce. However, the self-employed are a very diverse group and growing rapidly – more than a million people have entered self-employment since the financial crisis.

To ensure policy solutions are properly tailored to the self-employed, we believe it is important to understand their needs and interests.

That is why we commissioned the Pensions Policy Institute to find out more about the self-employed and what, if anything, should be done to prompt them to save.

It analysed three government surveys totalling around 90,000 people. Have a read of some of our findings.

Ian Browne is pensions expert at Old Mutual Wealth

Under-accumulation is still the biggest issue affecting our retirement prosperity and while auto-enrolment will go a long way towards tackling that, it still comes up short.

One of the main groups disenfranchised under auto-enrolment is the self-employed.

The government is likely to introduce a form of automatic pension saving for the self-employed workforce. However, the self-employed are a very diverse group and growing rapidly – more than a million people have entered self-employment since the financial crisis.

To ensure policy solutions are properly tailored to the self-employed, we believe it is important to understand their needs and interests.

That is why we commissioned the Pensions Policy Institute to find out more about the self-employed and what, if anything, should be done to prompt them to save.

It analysed three government surveys totalling around 90,000 people. Have a read of some of our findings.

Ian Browne is pensions expert at Old Mutual Wealth

The self-employed don’t use pensions 

Or at least not very often! Estimates do vary but our analysis indicates as little as 12% are actively paying-in.

It means they miss out on tax relief and stable investment growth in a retirement product. A lot of them are instead risking their retirement savings in the buy-to-let property market – a market that is under considerable pressure. The research shows that among 35-49 year olds, 25% of self-employed people have a buy-to-let, compared with less than 10% of the employed.

Their attitudes to saving are different

The self-employed have a general disaffection when it comes to pensions.

More than half (53%) think property is most likely to deliver returns. And 43% describe property as the ‘safest’ savings vehicle, while just 25% cite pensions as the most secure.

In comparison, among the employed the figures are reversed. More than half (52%) see pensions as the safest vehicle for retirement saving and just 25% favour property.

Interestingly, however, the evidence suggests that where they have had a workplace pension in the past through a spell of employment, they’re more likely to keep saving.

Half a million have an existing workplace pension   

Around half a million self-employed people have an existing pension from a period of work, having recently become self-employed.

As the smallest employers go through their auto-enrolment staging and people continue to chop and change between employment and self-employment, that number is set to increase.

Many are likely to fall out of pension saving through inertia, but will be ‘warmed-up’ to the idea of retirement saving. There is a big opportunity to prompt them to keep saving privately.

They procrastinate

Few self-employed workers are actively saving into a pension and when they do they tend to delay. The research shows that pension savers among the self-employed suffer from what we’ve called a ‘decade of delay’.

For example, the typical employed person aged 35-40 has £11,500 saved in pensions. The self-employed do not hit a similar figure (£11,000) until they are 45-50 years old.

It means they miss out on the benefits of investing over time and will ultimately need to pay in more to close the gap.

Only a handful of self-employed people are entrepreneurs           

Conducting the research it soon became apparent the self-employed were under-saving in pensions but we were interested to know whether they might be building value in a business instead.

But surprisingly, just 7% of the 5 million self-employed think their business will be their main source of retirement income. The finding is backed-up by the government’s own data analysis, which shows sole proprietors in decline.

It dispels any notion that the self-employed can substitute in value from their company in place of a pension.

That said, there is a risk that the minority of business-owning self-employed are ushered into a pensions if the government expand auto-enrolment. For many of those people defaulting into a pension may not be the preferred option, and we’re pressing government for a system that reflects the diverse needs of the self-employed group.

Ian Browne is pensions expert at Old Mutual Wealth

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