Self-employed workers face penury in retirement, with almost two-thirds failing to save for a pension, according to a new survey. The report has revealed that 62% of self-employed people have no pension, compared with 32% of employed workers. Business owners and sole traders typically have unpredictable incomes, meaning they may not have any money to spare for pension contributions in some years, but would want to make extra in years where they turn a big profit. Others might pay a large amount into a pension using the profits from selling their business.
However, changes to pension rules introduced in 2011 aimed at curbing tax perks for the super-rich has dramatically cut the annual amount that can be paid into a pension and still be eligible for tax relief. This means self-employed workers could be hit with huge tax bills if they exceed annual contribution levels.
This matters because the number of self-employed workers in Britain has boomed over the past two decades, rising from three million to almost five million since the turn of the century.
They are also excluded from auto-enrolment, the government scheme introduced in 2012 that forces employed workers to save into a pension. Since 2012, about ten million people have been swept into workplace pension schemes by their employers, thanks to automatic enrolment. Self-employed workers also miss out on the minimum 3% earnings top-ups paid by employers.
Describing the situation as a “time-bomb”, the big gap in pension provision is a growing concern for policymakers. It has prompted a series of new proposals from the government, including plans to use behavioural nudges and marketing tactics to raise awareness of pensions savings among the self-employed. However, some believe the government should have gone further and implemented a system where the self-employed are effectively automatically enrolled into a pension plan, via the tax system, unless they opt out. Extending automatic enrolment to the self-employed was an election commitment, made by the government in 2017, but it believes it is not ‘straightforward’ to deliver on this pledge. It means that while the government remains committed to investigating how to help self-employed workers save more for retirement.