Policy Action Needed To Help Millions Of Self-employed Workers Better Prepare For Their Retirement

29th September 2024

How well prepared for retirement are self-employed workers and what options do policymakers have to encourage more pension saving?.

For over a decade, pension participation for the self-employed has been stuck at very low levels, with only 20% of self-employed workers earning over £10,000 saving in a private pension (0.5 million out of 2.3 million).

This compares with 80% of employees earning over £10,000. While many self-employed workers save for retirement in other ways, it is striking that successive governments have put in place structures - through automatic enrolment - to make it much easier for employees to save in a pension scheme, but have not facilitated anything like the same assistance for the self-employed. In our judgement, the status quo, in which self-employed workers have to arrange their own pension plans, is not fit for purpose.

This is the key conclusion of a new report released today as part of the Pensions Review, led by the Institute for Fiscal Studies in partnership with the abrdn Financial Fairness Trust, and drawing on new focus group evidence, quantitative modelling and engagement with a wide range of stakeholders.

Key findings of the report include:

Despite having lower levels of earnings, self-employed workers have similar levels of wealth to private sector employees who are not currently saving into defined benefit pensions. However, the self-employed hold less of their wealth in pensions and more in housing, businesses and other savings.

But the direction of travel is concerning: pension participation of the self-employed has declined dramatically over the past 25 years. Among the self-employed earning over £10,000 per year, pension participation has collapsed from 60% in 1998 to 20% ever since 2013.

Among those self-employed who do save in a private pension, many get stuck making the same cash contributions year after year, with inflation eroding the real value of these contributions over time.
New modelling shows that the majority of the self-employed face inadequate retirement incomes if relying only on their own pensions - though a partner's pension, an inheritance or other savings may fill the gap for some. Over half (52%) of the self-employed have accumulated absolutely no private pension savings to date. And even if the projected pension incomes of partners (which might be shared), inheritances and other savings are fully used to bolster retirement incomes, we still find a substantial minority of the self-employed (between a fifth and a third) would fall short of commonly used benchmarks of retirement saving adequacy.

Taking this evidence as a whole, we judge that the current policy environment is not fit for purpose, as it is not making it sufficiently easy for the self-employed to make good saving choices.

Consequently, policymakers should pursue one of two options to make it easier for the self-employed to save into a pension:

One option is to require all self-employed individuals filling out a self-assessment tax return to make an active choice about the level of pension contributions to make at that point (with zero being an option). Any contributions made would then go into either a nominated private pension plan, a government-chosen default pension plan or a Lifetime ISA. Based on previous evidence, we can be confident that this would boost pension saving.
The second option is a form of automatic enrolment, again administered at the point of self-assessment. Unless choosing to opt out, a default level of contributions would be paid into a pension (or perhaps a Lifetime ISA).

Default contributions could be introduced at a moderate level and increased over time to the equivalent default total contributions for an employee. This could be expected to deliver a more substantial increase in pension participation than the first option and would be an appropriate choice for policymakers particularly concerned by the trends in pension saving among the self-employed.

In addition, to help self-employed people who are saving in a private pension contribute a more appropriate amount over time, the defaults on direct debit contributions should be changed so that they increase automatically, for example, in line with inflation.
Laurence O'Brien, Research Economist at the Institute for Fiscal Studies, said:

‘Successive governments have put great effort into establishing automatic enrolment for employees to make it easier for them to save for retirement and have done so with much success. In contrast, the self-employed are left to their own devices. People who spend a long time in self-employment are all too often on course to be reliant on their state pension, some modest other savings, and potentially a partner's pension or an inheritance to provide for them in retirement.'

David Sturrock, Senior Research Economist at the Institute for Fiscal Studies, said:

‘Policymakers have two key options to help the self-employed save for retirement. Both build on the fact that self-employed people have to fill in a tax return at the end of each year. Using that system, the government could either get the self-employed to make an active choice over whether to save into a pension or Lifetime ISA, or enrol them automatically into a long-term savings plan, which they could opt out of. Either way would reduce the hassle cost that self-employed people face when looking to save for retirement.'

Mubin Haq, Chief Executive of the abrdn Financial Fairness Trust, said:

‘The self-employed make up an increasing share of the UK's workforce but far too many are on track to have a poor retirement. More than half have no private pensions savings. Auto-enrolment was a sea-change for employees, rapidly increasing the numbers saving into a pension. We now need to use similar methods for the self-employed to actively nudge them into thinking about their financial futures. Changes to retirement savings take a long time to bear fruit so there is an urgency to ensuring action is taken sooner rather than later.’

Authors from the Institute for Fiscal Studies
Jonathan Cribb
Associate Director
Jonathan is an Associate Director and Head of Retirement, Savings and Ageing sector, focusing on pensions, savings and later-life economic activity.

Carl Emmerson
Deputy Director
Carl, a Deputy Director, is an editor of the IFS Green Budget, is expert on the UK pension system and sits on the Social Security Advisory Committee.

Laurence O'Brien
Research Economist
Laurence is in the Retirement, Savings and Ageing sector. His work focuses on people’s savings decisions and on economic activity in later life.

David Sturrock
Senior Research Economist
David’s research covers household wealth, intergenerational transfers, social mobility, pensions taxation, and health and work at older ages.