The Work and Pensions Select Committee is currently considering ideas to promote saving for later life amongst the 4.4 million self-employed. Ineligible for automatic enrolment, fewer than 16 per cent are contributing to an independent private pension (48 per cent in 1998) and only some 18 per cent participate in any form of workplace scheme.
On the 12th of July I wrote to the Committee with a proposal, and seven days later I found myself sat in front of it; perhaps I had hit a nerve?
Financial flexibility is key
As a group, the self-employed includes many people on low and volatile incomes with a strong cashflow management mindset. Locking money away, potentially for decades, is anathema, particularly to those who have not yet purchased a property. Consequently, financial flexibility is key.
In addition, there is no empathy for pensions’ mind-numbing complexity and impenetrable jargon, and Income tax relief baffles many people: rather than incentivising saving, it merely rewards those who do. And then there is the perennial problem that the self-employed lack any encouragement from employer contributions, greased by employer NICs relief.
Conclusion: many self-employed are ill-suited to traditional pension savings products, so there was no point in proposing one to the Committee. The opportunity to be creative arises because the self-employed enjoy access to the same state benefits as the employed, including the state pension. But those with annual profits exceeding the lower profits limit pay 3 per cent less in Class 4 National Insurance contributions (NICs) than employees’ Class 1 NICs.
A generous shove, rather than a nudge
I proposed that anyone who pays Class 4 NICs should be defaulted into a Self-employed Isa (“SISA”), with a minimum 3 per cent contribution requirement based on automatic enrolment’s band of £6,240 to £50,270 (in this context profits, not earnings). But those who opt out would see an additional 3 per cent added to their NICs payments to HMRC. So, save it or lose it.
In addition, self-employed Isa contributions should receive a 100 per cent bonus on the first £500 saved, and 50 per cent thereafter. Consequently, everyone with total annual profits of less than about £35,500 would receive bonuses that exceed the opt out penalty. Those with larger profits would still benefit from very high Treasury-funded returns on their contributions.
Flexible access
The self-employed Isa should be available from the age of 18 with tax-free access to funds from the age of 60. Crucially, however, savers should be able to withdraw funds before the age of 60 when purchasing their first home. This feature is important because most millennials care more about home ownership than saving for retirement.
The trigger
Is the lower profits limit the right trigger to use to auto-enrol the self-employed? At £12,570 (for 2023-24, when it becomes harmonised with the personal allowance) it is more than today’s £10,000 trigger, which is already criticised as being too high. Adopting a lower profits trigger (such as the small profits threshold, £6,725) would pull more of the self-employed into auto-enrolment’s embrace. However, it would be harsh to apply the opt-out penalty to those who do not pay any NICs today (Class 2 NICs are only payable if profits are above the lower profits limit). But let us be clear about purpose. We are seeking to catalyse a savings habit amongst a predominately low income population confronted with a cost of living crisis.
So let us not apply an opt-out penalty to those with profits below the lower profits limit, and hope that the prospect of a 100 per cent matching bonus will suffice for at least some people.
And why not let registering as self-employed with HMRC be the trigger, rather than use a profits-based trigger, accompanied by a grace period during which the opt out could be exercised?
Self-employed Isas should be accompanied by the same consumer protections as workplace pension products, including a charge cap, and be excluded for means testing purposes.
HMRC mechanics
The challenge then becomes one of HMRC mechanics, which the Select Committee rightly zoomed in on, conscious of HMRC’s inability to aggregate multiple small incomes for pensions’ automatic enrolment. But in respect of the self-employed Isa, the focus is profits, not income, and bonuses would be nothing to do with income tax paying status (no net pay issue!); they would be determined solely by the amount contributed.
So, could HMRC administer such a default trigger, accommodate opt outs, collect contributions through the NICs process, determine the annual bonus due, and then effect the transfer to an approved self-employed Isa provider (to include Nest, consistent with its public service obligation)? More to follow…..
Bonuses: incredibly good value for society
If a million people were to each save an average of £300 into a self-employed Isa, the bonuses would cost a mere £300 million annually. Contrast that with the £20 billion cost of employer NICs relief….. which does not, of course, benefit the self-employed (although they help fund it).
Conclusion
The combination of a default structure, generous bonuses, flexible access and personalisation make for an attractive proposition. In addition, the structure should pass a “reasonableness” test of public opinion. And how about a default bonus-driven Isa for gig-economy workers and employees with multiple sub-£10,000 incomes who are ineligible for automatic enrolment?