Is rising self-employment fuelling the pension time bomb?

By the end of 2017, many employees will be enjoying the benefits of automatic enrolment into a pension, whereby they are put into a workplace pension scheme without having to do anything. The main reason for auto-enrolment is to help ensure people have a reasonable retirement fund when they leave employment, and it will provide a degree of security even for people who have otherwise neglected to plan for retirement. The government's pension page explains it as follows:

"People are living longer yet too many people are under-saving or not saving at all for what could be a long retirement. The law on workplace pensions has changed to make it easier for millions more people to build up a pension, particularly those on lower incomes.

Automatic enrolment means that, rather than having to actively choose to join a pension scheme, staff are put into one by their employer as a matter of course. If they don’t want to be in the pension scheme, they must actively choose to opt out. It’s to encourage people to stay in pension saving."

For employees, this is great news - and the ability to opt-out means those with other provisions or who currently do not wish to put their income into a pension pot can remain unaffected. However, the plan also indicates a downside for the self-employed, as they are not entered into auto-enrolment.

Actually, there are large concerns over pensions for the self-employed. Almost 15% of all employment - 4.5 million - is comprised of people working for themselves. The Resolution Foundation finds that just 31% of self-employed people paid into a pension, much lower than the 52% of employees who pay in. Senior policy analyst Laura Gardiner believes there needs to be some government support like there is for employees:

"We think policy around pensions and access to credit needs to understand these workers better than it has done in the past. We've found some pretty clear evidence that they are not saving for retirement to the same extent as employees, and obviously with auto-enrolment coming in, that gap's probably only going to get wider."

With over two-thirds of the nation's self-employed not paying into pensions, there are genuine concerns regarding their retirement options. While there are other options for retirement than a pension, failing to save at all means they will be either working for the rest of their lives, or relying on the State Pension. Indeed, the report's co-author Conor D'Arcy explained that

"...there's a growing appetite for self-employment which is not deterred by the financial difficulties that can go with it... [L]ots of self-employed people are secure and comfortable, but there's worrying evidence that some are financially vulnerable because of the specific problems a self-employed person can have [including] providing for their retirement."

Resolution Foundation's chief executive, Gavin Kelly, reinforced this message:

"...self-employment is often a highly precarious existence which isn't that well supported by public policy. High levels of self-employment seem likely to be here to stay and policy makers have some catching up to do."

There are myriad reasons for the increase in the number of people turning to self-employment, including those of retirement age deferring the cessation of work. Of this specific group of people, some will be comprised of those who simply want to continue working, but some will also feature those who feel they have little choice but to keep working because their retirement fund is too small - if it exists at all.

However, there are positive signs of public policy extending to cover those working for themselves. From 2016 the Single-Tier State Pension will be rolled out, with the purpose of bringing the self-employed into the State Pension by treating their National Insurance payments the same as employee payments for State Pension purposes. It's not enough to warrant complacency regarding saving for retirement, but it's a step in the right direction.

Of course, saving can be easier said than done, especially with a typical self-employed person earning 40% less than the typical employed person. This doesn't remove the need for forward planning, but does indicate a strong need for people working for themselves to seek impartial financial advice to have the best chance possible of a comfortable retirement.

Call 0800 304 7288 for a friendly chat about your pension

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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