Can the collapse in self-employed pension membership be tackled?

Pension scheme membership among employees has risen by more than five million in the last four years following the policy of automatic enrolment into workplace pensions.

Related topics:  Retirement
Rozi Jones
23rd April 2016
Steve Webb

However Britain’s 4.4 million self-employed, who account for one in seven of the workforce, are not covered by automatic enrolment and coverage has "now reached crisis levels", according to Royal London.  
 
In the mid 1990s, estimates by the Department for Work and Pensions suggest that 62% of self-employed men of working age were saving into a pension. By 2012 that proportion had fallen to just 22%.

Royal London recommends a substantial ‘nudge’ to get the self-employed saving in a similar way to the approach that has been adopted for employees.
 
Its report recommends that the special category of National Insurance Contributions paid by self-employed people on their profits – Class 4 NICs – should be charged at a rate of 12% rather than the current 9%. But, instead of the additional contribution being retained by the Government, self-employed people would be able to opt to have that money diverted to a pension or Lifetime ISA, provided that they made their own direct contribution of at least 5%. The combined contribution of 8%, would match the statutory minimum under automatic enrolment.  
 
Whilst self-employed people would not be forced to take out a pension, Royal London says this would be the only way they could benefit from the additional 3% of NICs and is very similar to the way in which employed earners can only get a 3% employer contribution if they stay enrolled in a workplace pension.

It is estimated that around three million self-employed people would be covered by the new scheme and it could increase the number of self-employed pension savers by well over two million if opt-out rates are similar for this scheme as they currently are for automatic enrolment.

Steve Webb, Director of Policy at Royal London, said:

“Self-employed people are missing out on the surge in pension scheme coverage among employed earners. Indeed, whilst the number of self-employed people is growing, their membership of pension schemes has collapsed and is now at crisis levels. It is time for action. Using the existing National Insurance system to mirror the process of automatic enrolment is the best way of giving self-employed people a ‘nudge’ to start saving for a pension. In addition, because self-employed NICs are linked to profits, contributions would automatically go up in good years and down in poor years. Without action, millions of self-employed people could face poverty in old age”.
 
Huw Evans, Director of the ABI, added:

“This is an important report into an area of public policy that has received little attention in recent years; how to encourage self-employed people into greater saving for retirement. I hope Royal London’s proposals kickstart the debate that is needed so the decline in retirement saving from the self-employed can be tackled effectively.”

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