The Notebook: The self-employed pension crisis is on the cusp of boiling point
A new report has shown the self-employed are facing a pension crisis. Interactive Investor personal finance and pensions expert Craig Rickman digs into the findings in today’s Notebook
Why the self-employed face second-class retirement
Roughly four in 10 (38 per cent) self-employed workers have no pension savings at all – that’s one of a slew of stark findings from Interactive Investor’s (II) new report on self-employment, ‘Second-class retirement: the self-employed experience’.
For the best part of two decades, a self-employed pension crisis has simmered. And it’s now on the cusp of boiling point. In the absence of rapid intervention, millions could reach later life with inadequate savings.
Of course, you don’t have to use pensions to build retirement wealth. Alternatives include individual savings accounts (ISA), selling a business, and building a property portfolio. It doesn’t matter how you save enough, just that you do.
But the generous tax advantages of pensions, particularly upfront relief, means they are one of the most effective ways to build wealth quickly.
Worryingly, our research found that many self-employed workers who swerve pensions are not making provision elsewhere, either. Some 31 per cent have less than £1,000 saved and half have less than £10,000.
In their defence, the self-employed have had it tough over the past half a decade. As Covid-19 swept across the UK, the lockdown measures meant lots of small businesses had to close their doors for extended periods.
And since then, we’ve endured the harshest cost-of-living crisis for 40 years. When money is tight, longer-term goals naturally drop down the pecking order. You can’t save for tomorrow if you’re struggling to make ends meet today.
But now that inflation has cooled to a more manageable level, the time is ripe for the government and wider pension sector to address the self-employed pensions problem.
Labour’s move in August to launch a landmark pension review was well-timed. One would hope the government avoids hunting for short-term pension tax grabs at the upcoming Budget to fill the so-called fiscal “black hole” and keeps its sights on the bigger picture – which is to enhance the pension framework to make things better (and easier) for all savers, regardless of their employment status.
The auto enrolment revolution
While not everyone goes self-employed out of choice, it has clear attractions. You can manage your own workload, take time off whenever you like, and there’s no cap on what you can earn. But one drawback is the absence of workplace benefits, notably a company pension.
The introduction of auto enrolment in 2012 has boosted the retirement savings of millions of employed workers, nudging them closer to future financial security. Whether the current minimum contributions levels – you pay five per cent of qualifying earnings and your employer contributes three per cent – are sufficient is questionable, but the project has been a resounding success.
Extending auto enrolment to the self-employed has some obstacles, namely they don’t have regular and consistent earnings to deduct payments from. Still, the viability should be thoroughly explored. An option might be to embed an automatic opt-in model linked to the self-assessment tax return.
A final measure involves developing pension dashboards tailored to the self-employed to provide them a clear view of their retirement savings and help them to pay closer attention to what they pay in. The pensions dashboard project has been delayed, but is due for launch in October 2026. Let’s hope things stay on track this time around.
Testing and embedding these remedies can ensure more self-employed workers secure financial comfort in later life. And the work must start now.
The gender pensions gap
Although it was par for the course in years gone by, not all current workers aspire to a hard-stop retirement; some may prefer to phase out of work gradually. Interestingly, our research found that around a third (35 per cent) of self-employed workers aged over 55 plan to continue working beyond age 70, while only 17 per cent plan to fully retire.
Lack of sufficient savings is one reason to explain a larger proportion are aiming to stay in the labour force, but the capacity to tuck money away is often determined by how much you earn. While both genders experience challenges on this front, we discovered that women face steeper ones.
More than six in 10 (63 per cent) of self-employed women earn less than £30,000, compared to four in 10 (38 per cent) men. It therefore makes sense that a higher percentage of self-employed women (43 per cent) have no pension at all, compared to their male counterparts (35 per cent).
This is less than ideal but not a huge shock. The UK’s gender pensions gap has been well-documented.
We can attribute this in no small part to women spending less time at work due to family commitments, such as raising children and caring for elderly relatives. The flexibility that comes with self-employed work can enable women to find a balance here, but our survey shows the bottom line may suffer, narrowing the scope for long-term saving.
Quote of the week
“Part of what makes a job good, they understood, is the sense that what you do matters.”
Eula Biss, Having and Being Had
A recommendation
It’s far from a new documentary, but I rewatched ‘Who Killed the KLF?’ last weekend and was reminded how good it is. It charts the remarkable story of the Scottish electronic group who, despite treating the pop music industry as one big joke, became one of the best-selling bands in the world in the 1990s. The film includes a quite unbelievable stunt on a Hebridean Island involving £1m in cash.