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Self-employed pensions: ready for auto-enrolment?

Posted by Chris Torney on Nov 2nd, 2018 | Personal finance

Pensioners | Self-employed pensions: ready for auto-enrolment? | Crunch

Ministers should consider automatically deducting pension contributions from self-employed workers through the tax system, according to a leading investment firm.

Hargreaves Lansdown called on the government to take steps to address the fact millions of self-employed and freelance workers are failing to make adequate pension provision and do not benefit from the auto-enrolment programme currently being rolled out among UK employers.

The recommendation is one of the points the firm wants to see included by the Department for Work and Pensions in its inaugural review of the auto-enrolment system. The terms of reference for the review are scheduled to be announced in December.

Nathan Long, Senior Pension Analyst at Hargreaves Lansdown, said that the inclusion of the self-employed in auto-enrolment could be done in tandem with the introduction of new online tax services.

“Including the self-employed will help the 4.2 million who are currently sat on the sidelines without an employer,” Long said. “Auto-enrolment of the self-employed can happen through the rollout of HMRC’s digital tax accounts and will allow tax and pension contributions to be collected at the same time.”

He added: “The self-employed should also be given the choice to opt out, but only via the pension scheme and only after they have been defaulted into a pension to start with.”

Hargreaves Lansdown also said that both employees and self-employed workers should be given the choice of where their auto-enrolment contributions should be paid.

Huge pensions gap

The proposals come shortly after new research highlighted the huge gap in pension saving between employees and the self-employed. A survey carried out by Old Mutual Wealth found that only half of all self-employed workers aged between 30 and 45 have a personal pension compared with 86% of company staff in this age bracket.

Meanwhile, employees save on average £400 a month – including tax relief and employers’ contributions – as opposed to £290 for the self-employed. The study found that 84% of self-employed non-savers said they simply could not afford to put any money aside.

Old Mutual’s Jon Greer said: “The rapidly growing self-employed population aren’t saving enough for retirement and are sleepwalking towards poverty in later life. The Government needs to step in and help.”

Fading pensions optimism

A 2017 study showed that only 15% of Britain’s 4.6 million self-employed workers are very optimistic that they will have sufficient money to provide for their retirement. At the same time, three-quarters admit they do not save regularly for their old age.

The survey put the UK in second-last place out of the 15 countries it covered in North and South America, Europe, Asia, and Australasia. But while the research found a worrying lack of pension saving among UK self-employed workers, the flexibility offered by self-employment and freelancing could be beneficial in other ways.

Roughly half of those questioned in Britain said they felt optimistic that they would be able to decide when to retire, while most of the 53% who said they expected to work beyond 65 planned to do so for positive reasons – for example, because they enjoyed working or in order to keep their brains active.

Pensions gender gap

A rise in the number of self-employed women has raised concerns that the pensions gender gap could widen in the coming years.

Official figures from 2016 showed that around 1.5 million women described themselves as self-employed, representing a rise of 22% over the past four years – double the rate of growth of male self-employment.

According to insurer Prudential, these figures suggest there is a serious risk that, as more women start working for themselves, the current differences in pension provision between the sexes could widen to an even greater degree.

The company’s latest research shows that women have an average retirement income level around £5,400 less than that of men – although the gap has been narrowing to some extent over the last few years.

Much of this difference is down to the fact that, over recent decades, women have been more likely to spend time out of the workforce – for example, to bring up children or to care for elderly relatives.

Kirsty Anderson at Prudential said:

“There is a risk that the increase in self-employed women will undo some of the progress in shrinking the retirement income gender gap that we have seen in recent years. When becoming self-employed, pension contributions can easily slip down the priority list.

“But it is important to remember that one of the main reasons for lower average retirement incomes among women is the periodic gaps in their pension contributions.”

 

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