The likelihood of drastic reform to self-employed savings is growing

The first two decades of the 21st century saw a 43 per cent uptick in the UK’s self-employed population – but the proportion of them saving into a pension fell by 66 per cent over the same period. This has not escaped the attention of policymakers or the financial services sector, but the question that still needs an answer is what to do about it.

Why aren’t the self-employed saving?

This week is Pensions Awareness Week 2022, a week of promotion, support and advice aimed at those who have perhaps been avoiding the necessary task of engaging with their plans to save for later life.

This challenge is not unique to the self-employed, particularly during a cost-of-living crisis that threatens the capacity of many to set money aside. But the difference is that despite the success of automatic enrolment in boosting the number of people making regular contributions to a pension over the past decade, the reform does not cater for the self-employed.

It is a shortfall in direct catering for the self-employed that is, in part, a cause of the shortfall in saving. In an IPSE survey of freelancers last year, 14 per cent of respondents reported that they aren’t saving for later life in any way; reasons included there not being enough pension options to suit the self-employed (12%) and insufficient flexibility in products (6%).

But by far and away the most reported reason for not saving was not being able to afford to do so (59%). For many, this could be down to losing clients or a sudden spike in spending requirements.

But for many, the question of affordability is really a question of flexibility; the nature of working for oneself means that, at times, incomes will fluctuate – some months are stronger than others. Late payment and non-payment by clients is also an unfortunate reality for many. In short, the self-employed are used to being flexible with their money. They need savings products that are equally as flexible; allowing for variable contributions; reducing fears of money being locked away in times of emergency; and for alterations to be made quickly and easily in response to changing business needs.

Reform is coming – but what, or when, is still up for discussion

In Westminster and the City, momentum is building around the topic of how to get the self-employed saving adequately for retirement. Whilst simply expanding the existing automatic enrolment (AE) framework to the self-employed is unlikely to work, there are growing calls for government to make a similarly significant intervention.

In a report published in July, the All-Party Group for Financial Resilience (a cross-party group of backbench MPs with a keen interest in this area) called for the self-employed to be automatically enrolled through the tax system as part of a list of eight recommendations to help under-pensioned groups.

The Association of British Insurers (which represents long-term savings providers) made a separate call for government to consult on an increase to Class IV NICs, to be diverted into a pension if they’re saving into one – if they aren’t, government would presumably keep the money, creating a ‘use it or lose it’ nudge.

And more recently, the Fabian Society speculated on what a future Labour government could do for those working inside IR35 and who are ‘employed’ for tax purposes, yet aren’t entitled to an employer contribution to their pension by their client. Conversely, contractors working inside IR35 are typically required to work via an umbrella company, which provides the employer contribution on the client’s behalf – but this is really just part of the contractor’s own day rate being repackaged. Improving this situation would require the currently vague legal definition of an ‘employer’ to be tightened up.

With government still grappling with short-term political turmoil, and an election on the horizon, meaningful reform will take time that the self-employed can little afford.

Saving for retirement when self-employed

For help and support for how to plot a path to a secure retirement when working for yourself, the government-backed Money Helper service offers a free Midlife Pension Review catered specifically for the self-employed, plus free online resources and guides for the self-employed.

IPSE members can also benefit from our partnership with Penfold, a digital-first pension service provider, which aims to make savings as straightforward and as easy as possible. Through the partnership, IPSE members will receive £25 into their account when they open a pension with Penfold. Learn more about Penfold, including how to transfer your pension or start a new one here.