Self-employed workers should be nudged into retirement saving by increasing their NI contributions and then allowing them to divert that increase into a private pension plan says Royal London.
Proposals published by Royal London director of policy Steve Webb this week call for Class 4 NI contributions to be increased from the current 9 per cent to 12 per cent, with the self-employed then being given the option to have that money diverted to a pension or Lifetime Isa, provided that they made their own direct contribution of at least 5 per cent. The combined contribution of 8 per cent, would match the statutory minimum under automatic enrolment.
Whilst self-employed people would not be forced to take out a pension, this would be the only way they could benefit from the additional 3 per cent of NICs that they had paid in, mirroring the way in which employed earners can only get a 3 per cent employer contribution if they stay enrolled in a workplace pension. If the individual chose not to opt for a pension, the contributions would be retained by the Government.
Royal London estimates that around 3m of the UK’s 4.4m self-employed people would be covered by the new scheme. The plan – outlined in a paper ‘Britain’s “Forgotten Army”: The collapse in pension membership among the self-employed, and what can be done about it’ – is designed to tackle chronic levels of undersaving amongst the self-employed. Saving has plummeted amongst the self-employed from 62 per cent saving in a pension in the mid-1990s to 22 per cent in 2012.
Webb says: “Self-employed people are missing out on the surge in pension scheme coverage among employed earners. Indeed, whilst the number of self-employed people is growing, their membership of pension schemes has collapsed and is now at crisis levels. It is time for action. Using the existing National Insurance system to mirror the process of automatic enrolment is the best way of giving self-employed people a ‘nudge’ to start saving for a pension. In addition, because self-employed NICs are linked to profits, contributions would automatically go up in good years and down in poor years. Without action, millions of self-employed people could face poverty in old age”.
Federation of Small Businesses national chairman Mike Cherry says: “This report makes an interesting and valuable contribution to the debate surrounding how to best support the self-employed to save for their retirement. With the number of people choosing to be self-employed at a record high, this is a subject which needs much greater thought and attention. FSB will shortly be publishing our own research which will shed further light on the challenges raised in this timely Royal London report.”
Association of British Insurers director Huw Evans says: “This is an important report into an area of public policy that has received little attention in recent years; how to encourage self-employed people into greater saving for retirement. I hope Royal London’s proposals kickstart the debate that is needed so the decline in retirement saving from the self-employed can be tackled effectively.”
Beckett Financial Services director, workplace pensions Nicola Prince, Director says: “The numbers in this report are worrying. Those at the top of the self-employed earnings tables are no doubt able to access advice about the tax advantages and best providers/products to use for their savings for the future, and so are likely to have provision in place. It is the mid to low end that are the “forgotten army” who may not be getting those prompts and support. We are seeing thousands of employees enrolled into workplace pensions we have helped employers set up, many would not have joined voluntarily. A similar “automatic” solution for the self employed is an interesting concept.
There are now roughly 4.6 million self-employed people, an increase of over 1 million
since 2000, and accounting for around 15% of the workforce. Self-employment has
accounted for around half of the total growth in the workforce since the start of the last
recession.
In general, the self-employed tend to be older on average than the employed workforce,
with nearly half over the age of fifty.
Though the majority of self-employed people are men, the proportion of women is rising.
The self-employed are more ethnically diverse than the employed workforce with, for
example, 24% of Pakistani workers being self-employed compared with the UK average
of 15%.
The incomes of the self-employed are more diverse than those of employees. Whilst
average incomes of the self-employed are generally lower, there is also a much bigger
range between the highest earning self-employed people and the lowest earning,
compared with their employed counterparts.