Alarm bells ring, understandably, whenever research shows that pension saving among the self-employed is lower than that for the rest of the population.
Saving into a pension is synonymous with saving for retirement because pensions are designed specifically for this purpose. Tax relief is intended to enhance the appeal of pensions as the vehicle of choice for retirement savings. Therefore, if many of the self-employed are shown to be not saving into a pension, the worry is they are not preparing financially for retirement.
Rather than shoehorn the self-employed into a sub-optimal solution, they need a product designed for their unique needs
But are pensions the best fit for the self-employed? Could other savings vehicles be more suitable, especially if designed or tweaked to meet the needs of this cohort?
Starting point
In 2020, NOW: Pensions found 85% of self-employed people were not saving into a private pension. The remaining 15% had lower-than-average pension pots, and recent research from Twenty7tec’s wealth platform shows little has changed in the few years since.
Twenty7tec’s figures relate to people who receive financial advice, with employees tending to be in more senior roles, such as chief executive and finance director. Although the average pension pot is £217,904.41 for employees, the figure is much lower, at £152,275.49, for the self-employed.
What is perhaps more telling is the percentage of total assets going into pensions. For employees it is 31.65%, but for the self-employed it is 21.2%.
The real reason they are less likely to save in a pension is the lack of a central mechanism that makes it easier
Commentators say there are many reasons why so few self-employed people pay in to a pension, such as the current economic climate with high inflation.
This does not necessarily mean pensions are not fit for purpose for the self-employed, but we often hear that locking away money into a pension is problematic for this group of people, whose incomes fluctuate. Some see that as a red herring, however.
“While it is true that self-employed earnings patterns are much less predictable than those of the employed, the argument about lack of access to their money is more than slightly undermined by the greater propensity of self-employed individuals to save in the most inaccessible asset of them all — bricks and mortar,” says Intelligent Pensions technical director Fiona Tait.
The government still needs to do more to educate business owners and the self-employed
“I believe the real reason they are less likely to save in a pension is the lack of a central mechanism that makes it easier for them to do so.”
Auto-enrolment equivalent
It is often lamented there is no equivalent of auto-enrolment for the self-employed. But Quilter head of retirement policy Jon Greer points out the obvious practical issue in the lack of an employer to act as facilitator.
The success of auto-enrolment depends not just on people staying in the scheme because it is a hassle to opt out; it also depends on lots of individuals being signed up and their contributions collected.
“Utilising the annual tax return provides the clearest opportunity to get more self-employed people saving in pensions,” says Greer.
The Lisa would need to be rebadged and made available to over-40s to be truly impactful, so it would require a complete overhaul
“But it may be presumptuous to assume the inertia that has made auto-enrolment so successful extends to the entire self-employed population.”
This is because many people go self-employed because they want more independence and autonomy, which may extend to their finances.
Charles Stanley chief analyst Rob Morgan says one option for an auto-enrolment equivalent is to integrate HM Revenue & Customs self-assessment with an automatic pension contribution, potentially retrospective in terms of the tax year and from which people can opt out.
“At that stage, a self-employed person will better know whether they can afford the contribution and want to make one, and the tax benefit can be made obvious,” he says.
Redirecting National Insurance Contributions (NICs) to pensions could work, in Tait’s view, if only it wasn’t such hard work.
‘Self-employed’ is a wide-ranging term that encompasses anything from a self-employed landscaper to the owner of a multinational corporation
“Forcing employers to comply with auto-enrolment puts the onus on them. Using NICs means the Department for Work & Pensions would have to do it,” she says.
Self-employed people’s NICs would also have to rise to ensure there were enough contributions to be redirected.
“Unfortunately, the last time a [Conservative] chancellor tried to do that, he was forced into an immediate and humiliating U-turn, which has undoubtedly reduced any appetite for his successors to do likewise,” says Tait. “Whether a Labour government would find it so hard remains to be seen.”
Revamped Lisa?
Given that potential barrier, it makes sense to consider other options. The Association of Independent Professionals and the Self-Employed has suggested the Lifetime Isa (Lisa) could be revamped to fit the retirement savings needs of the self-employed.
The bonus the government awards is similar to tax relief but there are problems. With its age limit, contribution limit and 25% penalty for withdrawals before the age of 60, the Lisa was not designed with the self-employed in mind.
Utilising the annual tax return provides the clearest opportunity to get more self-employed people saving in pensions
“Arguably, the product would need to be rebadged and made available to over-40s to be truly impactful, so it would require a complete overhaul, perhaps separating the house-saving element completely,” says Greer.
Adapting something that already exists is likely to be easier and cheaper to implement, but the worry is it could complicate the existing Isa regime.
“Rather than shoehorn the self-employed into a sub-optimal solution, they need a product designed specifically for their unique needs,” adds Greer.
For some people, pensions will still be more beneficial. Higher-rate taxpayers are usually better off getting the tax benefits from a pension than receiving a limited bonus from a Lisa. So, even if the self-employed are saving elsewhere, overall it may not be as efficient as a pension.
Different strokes
One of the difficulties for both the government and financial services is that the self-employed are not a homogenous group. Trying to find a solution for retirement saving that appeals to a diverse range of businesses under the ‘self-employed’ umbrella is tricky.
“‘Self-employed’ is a wide-ranging term that encompasses anything from a self-employed landscaper to the owner of a multinational corporation,” says Curtis Banks senior marketing executive Caitlin Southall.
It may be presumptuous to assume the inertia that has made auto-enrolment so successful extends to the entire self-employed population
“Therefore, we need to be conscious there may not be one solution for everyone.”
NOW: Pensions is particularly interested in the barriers to retirement saving for self-employed women. According to the latest figures from the Office for National Statistics, of the 4.4 million people who are self-employed, 1.6 million are women.
NOW: Pensions head of PR and campaigns Samantha Gould points out that the number of self-employed women is growing because of the obvious appeal the flexibility has to those bringing up a family or caring for other relatives. But not contributing to a pension while they are working could have a devastating impact on the kind of retirement they can expect.
“The biggest cause of that isn’t the gender pay gap; it’s women taking time out of the workplace,” says Gould.
“We did some research last year that showed women take 10 years out on average and some take 16 years out.”
The result is it is difficult, if not impossible, to ever catch up. NOW: Pensions’ research shows that, for many women to do so, they would have to start saving for retirement at the age of four. For self-employed women, therefore, the message to put away some money for retirement is even more pressing.
The argument about lack of access to their money is undermined by the greater propensity of self-employed individuals to save in the most inaccessible asset — bricks and mortar
If an alternative to auto-enrolment or a revamped Lisa is not forthcoming, commentators say banging the drum about the importance of retirement saving is the only way forward.
“The government still needs to do more to educate business owners and the self-employed as to what options they have to save — particularly for retirement,” says Southall.
“For business owners, a personal pension may provide additional value because the company can also contribute to a pension by way of employer contributions.”
