Two million self-employed workers face pension crisis, warns IFS

Nearly two million self-employed workers in the UK are facing a looming pensions crisis due to inadequate savings, the Institute for Fiscal Studies (IFS) has warned.

The latest report reveals that only 500,000 self-employed individuals earning more than £10,000 annually are contributing to a pension, leaving 1.8 million without any pension savings.

This marks a significant decline in savings rates among the self-employed over the past 25 years. In 1998, nearly two-thirds of self-employed workers saved into a pension, whereas now the majority have never contributed to one. As a result, three-quarters of the self-employed are expected to retire on an income of less than £15,000 per year, including their state pension, according to the joint report from the IFS and the Abrdn Financial Fairness Trust.

At current savings rates, 55% of self-employed individuals will have no private pension provision at all in their retirement. The report suggests that a typical self-employed person aged between 25 and 34 can get back on track by saving 9% of their income annually, while those in their 50s would need to save 18% to achieve an adequate retirement income.

David Sturrock, an economist at the IFS, urged the Government to consider measures to encourage pension saving among the self-employed, such as prompting them to invest in a pension as part of their tax return process or automatically enrolling them into a pension plan unless they choose to opt out.

Sturrock said, “Policymakers have two key options to help the self-employed save for retirement. Both build on the fact that self-employed people have to fill in a tax return at the end of each year. The Government could either get the self-employed to make an active choice over whether to save into a pension or Lifetime Isa, or enrol them automatically into a long-term savings plan, which they could opt out of.”

The success of auto-enrolment for private sector employees, which has seen workplace pension participation soar from just over 40% to more than 85% since 2012, underscores the potential benefits of similar schemes for the self-employed, who are not currently covered by this system.

Mubin Haq, chief executive of the Abrdn Financial Fairness Trust, emphasised the urgency of government action, noting, “The self-employed make up an increasing share of the UK’s workforce but far too many are on track to have a poor retirement. More than half have no private pensions savings. Auto-enrolment was a sea-change for employees, rapidly increasing the numbers saving into a pension. We now need to use similar methods for the self-employed to actively nudge them into thinking about their financial futures.”

The report also recommends encouraging the self-employed to increase their pension contributions over time to counteract inflation. It suggests adjusting the default settings on direct debit contributions so they automatically rise, potentially in line with the consumer prices index, to ensure savings keep pace with inflation.

This approach would align private pensions more closely with the state pension system, which benefits from the triple lock, increasing payments by the highest of inflation, average wages, or 2.5%. The next state pension increase is expected to reflect wage growth, predicted to be around 4.1%.

A spokesman for the Department for Work and Pensions (DWP) responded, saying, “We welcome this report and will carefully consider its findings and conclusions in connection with our review of the pensions landscape to improve retirement outcomes and investment in the UK economy.”

With the self-employed forming a growing segment of the UK’s workforce, there is increasing pressure on policymakers to address the pensions gap and ensure better financial security for this group in retirement.

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Two million self-employed workers face pension crisis, warns IFS