The IFS warns that nearly two million self-employed workers in the UK face a looming pension crisis due to inadequate savings.
- A recent report indicates that only 500,000 self-employed individuals earning over £10,000 annually contribute to a pension.
- Three-quarters of the self-employed are expected to retire on an income of less than £15,000 per year.
- David Sturrock of the IFS suggests government intervention to encourage pension savings among the self-employed.
- The report advocates for automatic enrollment and inflation-adjusted contributions to improve retirement outcomes.
A concerning trend has been highlighted in a joint report by the Institute for Fiscal Studies (IFS) and the Abrdn Financial Fairness Trust, indicating that nearly two million self-employed individuals in the UK face a significant pension saving shortfall. The report reveals that out of all self-employed workers earning more than £10,000 annually, only 500,000 are actively contributing to a pension plan. This marks a stark contrast to 1998, when approximately two-thirds of self-employed workers were engaged in pension savings. The decline in pension contributions underscores the urgency of addressing this issue.
The report predicts a dismal financial outlook for self-employed retirees, with three-quarters expected to live on less than £15,000 annually, including state pension funds. A staggering 55% of these individuals are projected to have no private pension savings at all by the time they retire. This potential crisis accentuates the need for immediate action to improve pension participation rates among the self-employed.
David Sturrock, an economist at the IFS, has underscored the necessity of government interventions to bolster pension savings in this segment of the workforce. He proposes measures such as integrating pension choices into the tax return process or even automatically enrolling self-employed individuals into pension plans with the option to opt out. His suggestions build on the successful auto-enrollment practice in the private sector, which has increased participation in workplace pensions significantly since its inception in 2012.
Highlighting the success of auto-enrollment, Mubin Haq, the CEO of Abrdn Financial Fairness Trust, remarked that similar strategies should now be employed for the self-employed. Haq emphasized that this demographic forms an increasing portion of the UK workforce but remains underserved in terms of retirement savings provisions. Therefore, applying a model akin to that used for employees could effectively encourage better saving habits among the self-employed.
The report also advises adjusting pension contribution settings to rise automatically, aligned with inflation measures such as the consumer price index. This recommendation aims to ensure that personal pension savings keep pace with economic changes, reflecting the benefits seen in the state pension system, which is protected by the ‘triple lock’ mechanism. The Department for Work and Pensions has acknowledged the report’s findings and committed to considering its recommendations as part of a broader review of the UK’s pensions landscape.
Addressing the pension savings gap among the self-employed is imperative to ensure financial stability for future retirees in the UK.
