Extension of AE to self-employed would capture less than 50% of workers

The extension of auto-enrolment in its current form would capture less than half of the 4.8 million self-employed people in the UK, the Pensions Policy Institute has noted.

New research Policies for increasing long term saving of the self-employed, published by the PPI today, 2 October 2017, found that under the current auto-enrolment framework, just two million of the 4.8 million self-employed workers would be captured into pension saving if the policy was extended.

Further to this, an extension of auto-enrolment would disproportionately impact women, by excluding 73 per cent of the female self-employed population, Old Mutual Wealth noted.

The report, that was sponsored by Old Mutual Wealth, also revealed that the self-employers are less likely to save into a pension, with 12 per cent actively paying into a pension at present. Further, just over a quarter, 28 per cent, of the self-employed believe pensions are the safest way to save. A lesser seven per cent believe the largest part of their retirement income will come from their business.

The self-employed workforce has grown by one million people since 2008 bringing the total to almost five million. The government has noted that it will consider encouraging them into pensions by default in its auto-enrolment review.

In response to the PPI’s report, Old Mutual Wealth has proposed a multiple policy approach to increase retirement savings for a greater majority of the self-employed. This includes using the annual tax-return to nudge self-employed workers to nominate a pension arrangement to receive a pension. In addition, the possibility of a sidecar model could be considered. Old Mutual Wealth commented that this could: “create an optimal level of liquid savings (e.g. one-sixth of annual income), while maximising long-term savings by contributions being paid into a combined account structure initially distributed between a liquid account and another which is the pension account. Once funds reach a certain level in the liquid account, then all contributions would be paid into the pension account”.

Furthermore, the firm proposed the introduction of a package of changes aimed at increasing retirement savings such as “a collective income protection scheme which can generate the economies of scale needed to reduce costs”.

Old Mutual Wealth head of retirement policy Jon Greer said: “As the government embarks on its review of auto-enrolment, it needs to think about how it will adapt this successful policy to fit with current working practices. Currently, the self-employed are left out of this policy and with indications that that population is set to outstrip the number of public sector workers by 2020, the government needs to ensure it tackles the growing savings gap.

“But a savings policy for the self-employed also needs to acknowledge that there are legitimate reasons why some self-employed people do not engage in pensions. So to increase that engagement more innovation is required.

“The savings system also needs to recognise that not all self-employed people will want to commit money into a pension and there may be good reasons for this. One of the biggest challenges facing the self-employed is the lack of certainty and security of income, which is particularly evident for those with lower and moderate incomes. There is evidence that they resist ‘locking away their savings’ and tend to favour certain investments like ISAs over others. To make pensions more appropriate for the self-employed, a pension ‘sidecar’ should be explored, a pool of money made accessible at any age in times of need.

“I would urge the government to steer clear of a ‘one size fits all’ approach to pension saving for the self-employed.”

Pensions Policy Institute director Chris Curry added: “This research highlights the diversity that exists within the self-employed community, in terms of age, gender, industry, skill level, earnings, working patterns and expectations. By providing a stronger evidence base with which to better understand the variety of self-employed experiences and savings behaviour, this report is an important step along the way to improving retirement outcomes for the self-employed”

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