A recent report warns of an imminent pension crisis among the UK’s self-employed workforce.
- Only 500,000 out of 2.3 million self-employed individuals earn over £10,000 and contribute to a pension.
- More than half are anticipated to retire on an income below £15,000 annually, including state pension.
- Aged 25-34 self-employed individuals should save 9% of income, those over 50 should save 18%.
- Experts urge government measures to promote pension savings among the self-employed.
The Institute for Fiscal Studies (IFS) has issued a stark warning regarding the pension provisions for the UK’s self-employed sector. Nearly two million self-employed workers face a potential financial shortfall in retirement due to inadequate savings. Despite earning over £10,000 annually, only 500,000 individuals in this group are actively saving into a pension. This marks a dramatic decrease from 1998, when nearly two-thirds of self-employed workers contributed to their pensions.
The report highlights that more than seventy-five percent of the self-employed are predicted to retire on a very limited annual income, not exceeding £15,000, which includes any state pension benefits. As pension savings dwindle, over half of these individuals will lack any private pension provision upon retirement.
A remedy proposed involves significantly increasing the percentage of income saved, tailored by age. For example, a self-employed person aged between 25 and 34 would need to save 9% of their income annually, whereas those in their 50s would need to allocate 18% to sock away a sufficient retirement fund.
David Sturrock, an economist at the IFS, has called for governmental intervention to encourage pension savings among the self-employed. He suggests leveraging the tax return process, either by making pension choice mandatory or by automatically enrolling individuals into pension schemes unless they opt out. “Policymakers have two key options,” Sturrock articulated, “To make an active choice over pension contributions or to automatically enrol the self-employed in long-term savings plans.” Such measures echo the success of auto-enrolment policies in the private sector, where participation rose significantly from 40% to over 85% since 2012.
Mubin Haq, CEO of the Abrdn Financial Fairness Trust, underscores the pressing need for action. He notes the successful impact of auto-enrolment for employees and suggests a similar approach could catalyse pension contributions among the self-employed. “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.” Adjusting automatic direct debit contributions to rise with inflation could be one effective strategy, aligning with the state pension’s stable increases.
The Department for Work and Pensions (DWP) has acknowledged the report, vowing to carefully review its findings as part of an overarching review of the pensions landscape. With the self-employed making up a growing portion of the workforce, there is mounting pressure on policymakers to bridge the pensions gap and ensure financial stability in retirement for this demographic.
The increasing number of self-employed individuals in the UK underscores an urgent need for pension reform to ensure their financial security in retirement.
