A significant number of self-employed workers in the UK face a pensions crisis.
- Out of those earning over £10,000 annually, only 500,000 are contributing to pension schemes.
- Savings rates among self-employed have significantly dropped over the last 25 years.
- Many self-employed are at risk of having inadequate income upon retirement.
- Urgent government intervention is suggested to rectify the impending crisis.
The Institute for Fiscal Studies (IFS) reports an alarming trend affecting nearly two million self-employed workers in the UK, who are at risk of financial instability in retirement due to inadequate pension savings. Currently, just 500,000 out of the self-employed individuals earning more than £10,000 per year are contributing to a pension. This leaves approximately 1.8 million without any retirement savings, highlighting a stark decline in pension contributions over the last quarter-century.
In 1998, nearly two-thirds of the self-employed were engaged in pension saving. However, today the majority have never made any contributions, leading to a projected retirement income of less than £15,000 annually for three-quarters of them, including their State Pension. This is according to a joint analysis by the IFS and Abrdn Financial Fairness Trust.
The report further identifies that at current contribution rates, over half of these individuals, precisely 55%, will lack any form of private pension provision. To address this, it suggests that self-employed individuals aged 25 to 34 should save 9% of their income each year, whereas those in their 50s should aim to save 18% for a reasonable retirement income.
David Sturrock, an economist at the IFS, has urged governmental consideration of measures that could include encouraging the self-employed to opt for pension savings as part of their tax returns or applying automatic enrolment unless opted out. “Policymakers have two key options to help the self-employed save for retirement,” he stated, highlighting the success of auto-enrolment strategies in increasing pension participation among private-sector employees.
Mubin Haq, CEO of Abrdn Financial Fairness Trust, stressed the growing size of the self-employed workforce and their concerning lack of private savings. “More than half have no private pension 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,” Haq argued, emphasising the urgency for governmental action.
Additionally, the report recommends adjusting pension contributions over time to counter inflation, proposing adjustments in direct debit settings to rise automatically with the consumer prices index. Aligning the private pension system more closely with the State Pension system, which benefits from the triple lock, could enhance financial security for the self-employed.
A spokesperson for the Department for Work and Pensions commented positively on the report, signalling openness to integrating its findings in the broader review of the UK pensions landscape, thereby improving retirement outcomes and stimulating economic investment.
Immediate and strategic action is necessary to safeguard the future financial stability of the UK’s growing number of self-employed workers.
