Solving the self-employed savings crisis

The rise and rise of the self-employed sector in recent years has been nothing less than revolutionary. Since 2000 alone, it has grown by 50 per cent. With 4.8 million people, it now accounts for 15 per cent of the UK workforce – almost as much as the entire public sector. But as self-employment has boomed, existing systems have just not kept pace. And in one area in particular, this is turning into a ticking time bomb: pensions.

The self-employed simply aren’t saving enough for later life. And unless something is done soon, hundreds of thousands of self-employed – especially millennials – are at risk of a bleak retirement future.

As new research commissioned by IPSE (the Association of Independent Professionals and the Self-Employed) shows, just 31 per cent of self-employed people are paying into a pension. In fact, as self-employed numbers have risen, the proportion saving for later life has actually fallen. It’s not just pensions either: IPSE’s research – conducted by ComRes – found that just 33 per cent of the self-employed are saving through ISAs and a shocking 2 per cent are using Lifetime ISAs.

Worse, the countdown on this time bomb is already shorter than most people think. As IPSE’s report shows, the average age of self-employed people in the UK is significantly higher than employees: 46 compared to 29. In fact, 44 per cent of all self-employed people are aged between 50 and 65 – and so are already approaching retirement age.

There isn’t long until that dial ticks down to zero. Then there is a real risk not only of individual pensioner poverty, but also – as a knock-on effect – of more and more pressure on the already strained state pension fund.

What’s caused the crisis?

To develop solutions to the crisis, IPSE’s report delves not only into the causes of the crisis, but also – for the first time – into the attitudes of self-employed people towards pensions. First of all, it finds that it’s not that self-employed people aren’t concerned about saving for later life: in fact, according to the research, 67 per cent of self-employed people are worried about their retirement-age finances.

So, what’s stopping them from saving? Well, financial concerns seem to be a major factor. 37 per cent of self-employed people said they were not paying into a pension scheme because they could not afford to and a further 17 per cent said they had other financial priorities.

The research also found that one of the groups least likely to be paying into a pension was younger self-employed people. Millennials seem to be putting off saving for later life, seeing retirement as too far-off to be concerned about.

In fact, there is a problem with engagement across the sector because, essentially, pensions have a PR problem. The pension industry’s complex language and jargon – combined with the amount of paperwork involved – have deterred many self-employed people from actively saving for later life. As the report shows, however, 51 per cent of self-employed people trust Government advice on pensions, so perhaps this could be a route through the jargon and confusion.

Finally, most existing pensions options don’t fit the self-employed. Above all, they want more flexible ways of saving. 54 per cent of self-employed people surveyed said one of their top three savings options would be a system that allowed them to pause, stop and restart payments. 25 per cent also chose a system that would allow them to withdraw a proportion of their pension pot early.

With flexibility a key concern, it’s not surprising the report finds automatic enrolment won’t work for the self-employed. Although it has significantly increased pension uptake among employees, it wouldn’t give the self-employed the flexibility they need. That’s why 25 per cent said they would opt out if they were auto-enrolled, and 38 per cent said they just didn’t know. It’s clearly far from a panacea for all ills when it comes to the self-employed sector.

Defusing the time bomb: what can be done?

So, based on all this analysis of the sector, what can be done to avert the looming crisis? The report has six key recommendations:  

1. Use the sidecar pension model: This would cater well for the low- and middle-earning self-employed who want more flexibility. It works by channelling money into a pension pot as well as a ‘rainy day fund’ to draw on in emergencies.
2. Tailor savings guidance to the self-employed: 51% of the self-employed trust Government websites for advice, but many said their guidance focused too much on employees. The new Single Financial Guidance Body should offer guidance that’s tailored specifically to the self-employed.
3. Create more accessible policy documents: Focus groups for the report said that in pension policy documents, they were usually overwhelmed with detail and jargon. They should be simplified, jargon-free and written in plain English.  
4. Roll out the mid-life MOT: A mid-life MOT would allow mid-career self-employed people to identify gaps in their savings and take action before it’s too late.
5. Universities, schools and pension providers should work together to give younger people an education in finance: Pension providers could support this by engaging with students on courses that typically lead to self-employment – like the creative arts.
6. The Government should not introduce automatic enrolment for the self-employed: There is no clear way this would work for the self-employed. They are also ambivalent about it and likely to opt-out. More energy should be put into systems like the sidecar pension.

There are also many more recommendations in the report. Download it to see them all.

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