The Institute for Fiscal Studies (IFS) has issued a grave warning regarding the pension savings of nearly two million self-employed individuals in the UK. The latest statistics reveal a substantial decline in pension participation among this segment of the workforce. Immediate action appears necessary to avoid a widespread financial crisis.
Alarmingly Low Pension Participation
Only 500,000 self-employed individuals earning more than £10,000 annually are currently contributing to a pension. This leaves an alarming 1.8 million people without any pension savings. The reduction in savings rates over the past 25 years is striking.
In 1998, almost two-thirds of self-employed workers contributed to a pension. Today, however, the majority have never made any pension contributions. As a result, three-quarters of these individuals are projected to retire on incomes of less than £15,000 per year, inclusive of their state pension.
Dire Future Without Private Pension Provisions
The joint report from the IFS and the Abrdn Financial Fairness Trust indicates that, at current savings rates, 55% of the self-employed will have no private pension provision in their retirement.
David Sturrock, an economist at the IFS, recommends that the Government takes measures to promote pension saving among self-employed workers. He suggests either prompting them to invest in a pension during their tax return process or automatically enrolling them in a pension scheme, with an option to opt out.
Suggested Solutions by Policymakers
Policymakers have a few options to help the self-employed save for retirement. Sturrock mentions that both proposed measures leverage the fact that self-employed individuals must complete tax returns annually.
The Government could require them to make an active decision regarding pension or Lifetime ISA contributions. Alternatively, they could automatically enrol them into a long-term savings plan.
The success of auto-enrolment for private sector employees, which has significantly increased workplace pension participation from just over 40% to more than 85% since 2012, illustrates the potential benefits of similar schemes for the self-employed.
Rising Self-Employed Workforce
The self-employed make up a growing share of the UK’s workforce. With this shift, there is increasing pressure on policymakers to address the pensions gap and ensure financial security for these workers in retirement.
Mubin Haq, chief executive of the Abrdn Financial Fairness Trust, underscores the urgency of the situation. He points out that more than half of the self-employed have no private pension savings.
Encouraging Increased Contributions
The report suggests incentivising self-employed workers to increase pension contributions over time, helping counteract inflation. One recommendation is to adjust direct debit contributions so they automatically rise, potentially in line with the consumer prices index.
Aligning private pensions more closely with the state pension system could help. The state pension benefits from the triple lock, which ensures increases by the highest of inflation, average wages, or 2.5%.
Government Response and Future Considerations
A Department for Work and Pensions (DWP) spokesperson has acknowledged the IFS report. He stated, “We welcome this report and will carefully consider its findings and conclusions in connection with our review of the pensions landscape to improve retirement outcomes and investment in the UK economy.”
Given the growing number of self-employed individuals, there is mounting pressure on the Government to take action. Addressing the pensions gap is crucial for ensuring better financial security for the self-employed in their retirement.
Conclusions from the Report
The report’s findings make it clear that without intervention, many self-employed workers face a challenging and financially unstable retirement. Immediate measures should be considered to encourage pension savings among this vital segment of the workforce.
The IFS report paints a bleak picture for the future of self-employed workers’ retirement savings. Immediate action is necessary to mitigate this impending crisis.
Measures such as automatic enrolment and incentivising pension contributions could offer the needed relief and ensure financial security for self-employed individuals in their later years.
