An alarming report from the IFS highlights a pension crisis among UK self-employed workers.
- Only 500,000 self-employed workers earning over £10,000 annually are saving for pensions.
- The report reveals three-quarters are expected to retire on less than £15,000 per year.
- Recommendations urge the government to incorporate pension decisions into tax return processes.
- Calls for auto-enrollment and inflation adjustments to align private pensions with state systems.
The latest findings from the Institute for Fiscal Studies (IFS) and the Abrdn Financial Fairness Trust reveal a significant pension crisis looming over nearly two million self-employed workers in the UK. Focusing on the lack of adequate pension savings, the report specifies that out of the self-employed individuals earning more than £10,000 per year, only 500,000 are currently contributing to a pension. This stark data highlights a downward trend in pension contributions from this group over the past 25 years. Whereas in 1998, two-thirds of self-employed workers made regular pension contributions, the majority today have never engaged in such savings.
Consequently, the report anticipates that approximately three-quarters of the self-employed population will likely face retirement with incomes under £15,000 per year, inclusive of their state pension. At the prevailing rate of savings, 55% of these individuals are predicted to have no private pension provision upon retirement. Specific recommendations within the report urge those in their 20s and 30s to save at least 9% of their annual income, while individuals in their 50s should aim for an 18% contribution to secure an adequate retirement income.
David Sturrock, an economist at the IFS, suggests pivotal actions for the government to alleviate this impending crisis. He advocates for measures such as introducing pension saving choices during tax filing or enabling automatic pension enrollment for the self-employed, mirroring successful initiatives in the private sector. Auto-enrollment has previously increased participation rates from just over 40% to above 85% for employees since its introduction in 2012.
Mubin Haq, CEO of Abrdn Financial Fairness Trust, similarly underscores the importance of swift government intervention. He points out that more than half of the self-employed workforce is devoid of private pension savings. Haq emphasizes the need to catch up with the private sector, which has seen a revolutionary shift in pension saving behaviors due to auto-enrollment mechanisms.
Additionally, the report proposes aligning private pensions more closely with the state pension system by automatically adjusting contributions in accordance with inflation. This could be achieved by revising the default settings of direct debit contributions, allowing them to rise with measures such as the consumer prices index. Such an approach would offer a dynamic alignment between private and state pensions, promising enhanced financial security for retirees.
The urgency for government action is evident, as millions of self-employed individuals face potential financial insecurity in retirement.
