Self-employed workers risk “sleepwalking into a pension nightmare” as lower and more volatile incomes, a lack of employer contributions, and exclusion from automatic enrolment continue to weaken retirement saving, AJ Bell has warned.

AJ Bell head of personal finance, Sarah Coles, argued that the combination of insecure earnings and a lack of an employer safety net meant pension saving was often pushed down the priority list for people working for themselves.

“Only around a fifth of them pay into a pension, and even when they do, they pay in less than their employed counterparts. On top of that, there’s no employer contribution to make up the difference," she said.

Coles noted that this created a particular risk for self-employed women, who were more likely to work part-time and could also face career breaks without employer pension contributions continuing during maternity leave.

More broadly, she suggested that the structural differences between employed and self-employed work were central to the retirement savings gap.

“Some of this is also down to the fact they don’t benefit from auto-enrolment rules, so instead of inaction leading to automatically joining a scheme at work, inaction leads to not having a pension at all," Coles added.

“If they want to pay into a pension, they have to make active choices, and often there’s too much else to worry about, so it takes a back seat.”

Coles also pointed to the impact of lower and less predictable incomes, noting that self-employed earnings could be “lumpier”, with stronger and weaker months making it more difficult to commit money to a pension where savings are locked away for the long term.

She added that this could make more flexible savings vehicles, such as ISAs, more attractive to some self-employed workers, particularly where they may need access to money during periods of weaker income.

Echoing these concerns, AJ Bell’s Money Matters research found that just 25 per cent of self-employed people prioritised pension contributions, compared with 31 per cent of employed people.

In contrast, 35 per cent of self-employed respondents said day-to-day living costs were a priority, 28 per cent said simply surviving was a priority and 27 per cent prioritised emergency savings.

Coles said the lack of sick pay, redundancy pay and greater employment security also increased the need for self-employed people to hold accessible savings.

Government data has previously highlighted the scale of the pension participation gap, with just over one in five self-employed people paying into a pension, compared with four in five employees.

Among those who were contributing, AJ Bell found that the most common contribution rate was between 3 and 5 per cent of salary, regardless of employment status.

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