The self-employed risk being left behind in the pensions revolution. Michael Klimes examines a proposal to tackle this issue.
- Around 62% of self-employed men were members of a pension scheme in mid-1990s
- By 2012 this proportion had fallen to less than 25%
- Changes to Class 4 national insurance contributions could be used to address this decline
Auto-enrolment (AE) has altered the pensions landscape profoundly and there has been a dramatic increase in the number of people saving into a workplace scheme.
In March, The Pensions Regulator's (TPR) monthly AE declaration of compliance found the number of people who had started saving into a company scheme since auto-enrolment (AE) began had hit the six million mark. Similarly, more than 100,000 employers had enrolled employees.
But the number of self-employed people enrolling into a pension has gone the opposite way.
A report from Royal London – Britain's Forgotten Army – finds that the self-employed account for a growing proportion of the labour force in Britain, noting there are now approximately 4.6 million self-employed people, an increase of over a million since 2000. Furthermore, self-employment has accounted for around half of the total growth in the workforce since the start of the recession in 2008.
But Royal London says that while around 62% of self-employed men were members of a pension scheme in the mid-1990s, by 2012 this proportion had fallen to just 22% – and asked what can be done to tackle this issue.
NICs for pensions
The report recommends that the national insurance contributions (NICs) paid by self-employed people on their profits be used for saving for retirement - saying those who have profits in excess of £8,060 a year, and pay what are known as Class 4 NICs, should be charged at a rate of 12% rather than the current 9%.
However, it says that, instead of the additional contribution being retained by the government, self-employed people would be able to opt to have that money diverted into a pension or lifetime ISA (LISA), provided they make their own direct contribution of at least 5%. The combined contribution of 8%, would match the statutory minimum under AE.
However, the report concedes this will still leave out self-employed individuals who report profits of less than £8,060 a year, and currently pay Class 2 NIC contributions.
Also, the self-employed do not view pensions favourably. The report references research from the Citizens Advice that suggests levels of understanding of pensions are relatively low among many self-employed people.
Nearly seven in ten self-employed people surveyed by Citizens Advice did not correctly understand the tax advantages of pension saving. Furthermore many assumed if they took out a pension they would be obliged to maintain a regular monthly contribution, regardless of the state of their business.
The research also found pensions were not well trusted and that self-employed people with spare cash to invest would prefer a savings account, cash ISA or property rather than investing in a pension.
Royal London's report also asks how many providers would take the self-employed as clients.
Royal London director of policy Steve Webb (pictured above) argues that bold action is needed to correct the imbalance between the self-employed and employed: "Self-employed people are missing out on the surge in pension scheme coverage among employed earners," he says. "Indeed, while the number of self-employed people is growing, their membership of pension schemes has collapsed and is now at crisis levels. It is time for action.
"Using the existing national insurance system to mirror the process of automatic enrolment is the best way of giving self-employed people a ‘nudge' to start saving for a pension. In addition, because self-employed NICs are linked to profits, contributions would automatically go up in good years and down in poor years. Without action, millions of self-employed people could face poverty in old age".
Federation of Small Businesses national chairman Mike Cherry welcomes the report and says: "This report makes an interesting and valuable contribution to the debate surrounding how to best support the self-employed to save for their retirement. With the number of people choosing to be self-employed at a record high, this is a subject which needs much greater thought and attention."
Association of British Insurers director Huw Evans adds: "This is an important report into an area of public policy that has received little attention in recent years, how to encourage self-employed people into greater saving for retirement. I hope Royal London's proposals kickstart the debate that is needed so the decline in retirement saving from the self-employed can be tackled effectively."
With the pensions system being divided between those who are self-employed and those who are not, any policy suggestions to correct this must be welcome.
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