The silent self-employed pension crisis

If you are self-employed, there are a probably a few key money worries: having a cash buffer in your business account, having enough to pay your taxes, having a cash buffer in your personal account in case you have cash flow issues and actually remembering to pay your taxes.

What you do not see on this list of immediate financial priorities is your own pension savings.

There are many great things about being self-employed – freedom, flexibility etc. etc. but the price that nearly 7 in 10 self-employed people are paying for this career choice is their own income in retirement. Once they have shuffled off the working coil, they realise, often too late because they’ve been so busy you know, running a business, that there’s nothing left. Nada. Zilch. Diddly Squat.

A report published today by IPSE,  the Association of Independent Professionals and the Self Employed, found that only 31 per cent of the 4.8 million self-employed people in the UK are saving into a pension.

The research shows three groups most at risk: those new to self-employment, women and younger self-employed people. With the rate of women entering self-employment growing by 75 per cent, and the sharp rise of 16-24-year olds (104,000 in 2001 to 181,000 in 2016) these sub-sections of the self-employed simply cannot be ignored.

For the majority of self-employed people, who after decades deferring their own retirement saving finally reach the point where they need some, the point of retirement will be like standing on the edge of a giant, black crater, wondering how to get across.

Many assume they will just keep working until they die, but with the best will in the world, you cannot plan to do this. Ill health is an underestimated barrier to further work the older one gets and it is something that it would be wise to assume will happen, rather than, as most do, assume it will not.

IPSE predicts that a failure to alleviate the self-employed pensions crisis will only exacerbate the burden on the state further. If a large proportion of self-employed people enter retirement and rely on the modest state pension as their primary, rather than supplementary source of income, we may see an increase in pensioner poverty and a downward shift in living standards.

It suggests there are three main problems:

• Millennials are not saving for later life: For understandable reasons, saving for later life is a distant prospect for this section of the self-employed. They face difficulties with saving and have not been either proactively engaged by the pensions industry about the benefits of saving or offered savings options that are flexible enough to suit their needs.

• Pensions have a PR problem: Laborious paperwork and complicated language make pensions inaccessible for many. As a result, people don’t engage with them which can ultimately deter them from saving for later life. The banking industry suffered from similar problems but has since overcome them using apps to improve engagement.

• Automatic Enrolment (AE) doesn’t work the self-employed: The pensions industry and Government has focused on how to treat self-employed people like employees by investigating ways of extending AE to this sector. As the Government review concluded last year, however, there is no clear way. Our research shows a clear majority would either opt-out or were unsure. Instead, the Government and the pensions industry should redouble efforts to better engage with the self-employed and provide them with the flexible options they want.

And six key recommendations:

1. Roll-out the sidecar pension: This product works by channelling money into both a pension pot and a separate ‘rainy day fund’ to be drawn on in times of emergency. Whilst not a catchy name, it would certainly cater well for the low-middle earning self-employed who want more flexibility in their savings options.
2. Provide tailored guidance on saving for the self–employed: 51 per cent of the self-employed trust Government websites for advice but many found this guidance too heavily focused on employees. Going forward, the new Single Financial Guidance Body should offer tailored advice for the self-employed.
3. Pensions policy documents should be jargon free and written in plain English: Many in our focus groups told us they only wanted to know the key terms of a pension policy and were often overwhelmed by unnecessary terms and conditions that could be moved into an appendix.
4. Roll out the mid–life MOT: This would enable mid-career self-employed people to identify gaps in their savings and address where action is needed before it becomes too late.
5. Universities, schools and pension providers should work together to provide financial education for younger people: This could be supported by pensions providers engaging with students on courses that typically lead to self-employment, such as the creative arts.
6. The Government should not introduce Automatic Enrolment (AE) for the self-employed: There is no clear way this would work for the self-employed. They are ambivalent about the policy and likely to opt-out anyway. Instead, more energy should be focused on providing options such as the sidecar pension.

You can download the full report here.

Tom McPhail, head of policy at Hargreaves Lansdown, said:  “This is an excellent analysis of the self-employed workers’ retirement saving challenge, with a sensible and balanced package of proposals. It recognises there is no simple one-size-fits-all solution; in particular it avoids the call for the government to just auto-enrol everyone through the tax system, which would be extremely difficult to deliver on at this time.”

“The report brings together solutions such as the sidecar account, financial guidance and education, better engagement from pension providers and the mid-life financial MOT, all of which should be developed as quickly as possible.”

“The one measure we think should be added to this list, is the right for individuals to ask employers to pay pension contributions into a pension of their own choice. This would strengthen individuals’ relationship with their retirement savings and increase the likelihood of them continuing to save when moving between jobs or going self-employed. Most self-employed people start their working lives in employment, on average not making the switch to self-employment until the age of 32. So the self-employed challenge isn’t just a question of getting them into pensions; it’s more one of how we stop losing them when they transition from employment to self-employment.”

Jon Greer, head of retirement policy at Old Mutual Wealth, said: “One of the biggest challenges facing the self-employed is the lack of certainty and security of income, which is particularly evident for those with lower and moderate incomes. There is evidence that they resist locking away their savings and tend to favour certain investments like Isas over others. IPSE has suggested that a pension sidecar should be explored, a pool of money made accessible at any age in times of need. This would get away from the ‘either or’ nature of pension saving and serve to make pensions more appropriate for the diverse self-employed population.”