A report by the Institute of Fiscal Studies shows that there has been a dramatic decline in pension savings by self-employed people, with some 3.5million working age self-employed people not saving into a pension. The research shows the proportion of working-age self-employed saving in a private pension has declined dramatically over the last two decades, from 48% in 1998 to just 16% by 2018. In contrast, approximately 80% of working age employees contribute into a pension, thought to be largely due to auto-enrolment.
Pension participation fell more dramatically among those who had been self-employed longer and those with higher levels of income:
- Nearly 70% of the self-employed who were earning over £500 per week were saving in a pension in 1998-99, compared to 24% by 2018-19.
- Over 60% of those who had been self-employed for more than seven years were saving in a pension until 1998-99; by 2018-19 this was 23%.
Furthermore, it does not appear that other financial assets are acting as a substitute for pension saving among the self-employed. The proportion of individuals saving in either a pension, savings account, ISA or shares has been declining over the last 20 years, and more rapidly for the self-employed than for employees.
We attended today’s IFS webinar which presented the results of their research. Amongst other things the discussion noted that this is not a new problem, and that 16 years ago the Pension Commission first put in writing the fact that pension saving amongst the self-employed is not increasing, and therefore remains a concern. Given that a lack of understanding and a lack of confidence in pensions are likely reasons behind people not saving, Alistair McQueen from Aviva suggested taking a fresh approach with 3 main actions:
- Better financial education from the Money and Pension Service (MaPS) and pension providers to empower people to take control of their money
- Redouble efforts by pension providers to embrace digital technology. 9 out of 10 people that use the internet regularly are also using it for their banking, but only 1 in 10 are using it for their pension.
- Work with all who are interested to close the advice gap. Pension providers want to help but current regulations prevent them from advising. 91% of the UK population do not seek financial advice, so no-one is guiding them about pensions.
Auto-enrolment hasn’t fixed the lack of understanding and the lack of confidence problems, instead it has just plastered over the problems and forced people to save into pensions. A similar approach of auto-enrolment for self-employed people is impossible because they are not employees, not paid via PAYE therefore pension deductions at source would be impossible.
Clearly there is much more work to be done in engaging with self-employed people to encourage pension savings, but there is no obvious answer.