Automatic enrolment began in 2012 and the phase-in period for employers of all sizes is due to end in early 2018. But 4.8 million self-employed people have been left out.
HM Revenue & Customs (HMRC) reports that the number of self-employed Britons who actively pay into a personal pension pot has fallen from 950,000 to just 350,000 between the 2006/07 and 2015/16 tax years. This means that 4.4 million people are either using an alternative saving method, or, more likely, failing to save for the future at all.
A Department of Work & Pensions (DWP) review of automatic enrolment is underway, with a vision to enable self-employed workers to access auto-enrolled pension schemes. However, if current enrolment guidelines are used for the plans, up to three million self-employed people could remain excluded.
Worryingly, The Office for national Statistics (ONS) have published data for 2015 which shows that the highest number of full-time self-employed people are aged between 48 and 50; an age when planning for retirement is crucial.
What are the reasons for the shortfall?
Currently, employees over the age of 22, who earn above £10,000 per year, are automatically placed into a workplace pension. Both the employee and their employer pay a percentage of the employee’s earnings, based on the national minimum contribution guidelines (this is currently 1% each for employer and employee, but is set to rise).
The introduction of the scheme solely benefitted those in employment and did not include the self-employed, low-income, part-time or multiple job workers.
Of course, everybody has the opportunity to open a personal pension and pay into it as and when they can afford to do so. But, it seems that, for some self-employed people, pensions are not a priority.
Attitude toward pensions
The Pensions Policy Institute has released data which shows that:
- Just 28% of self-employed workers feel that pensions are the safest way to save for their future, compared to 52% of people in employment
- 7% are relying on their business to provide the largest part of their retirement income
- 53% plan to access the value held in property to support them during retirement
Undervaluing the benefits
It is possible that so many self-employed people do not have a pension plan simply because they do not see the benefits of doing so. However, developing a plan for retirement:
- Ensures that you will have an income when you stop working
- Means that you do not need to worry so much about whether your business or property will hold enough value to cover your living costs in retirement
- Provides a safety net to support your spouse, partner or dependents when you die
- Offers a tax-efficient way to save for retirement
Understanding the risk
Without a pension plan or savings on top of the value of a business or property, self-employed people face a possible financial crisis when they finish working. The State Pension offers some support, but with an income of less than £10,000 per year, it can result in a need to cut back on expenses to afford to live.
Although a large number of self-employed workers are over 45 years of age, it is never too late to begin planning for retirement. Saving for retirement whilst you still have a regular income provides peace of mind and sets you up for a more comfortable lifestyle when you decide to stop working.