There are now an extra 1.5m self-employed people compared with 2001, but the proportion of self-employed saving into a pension has fallen dramatically. The government is aware of this time bomb but has committed to little. Is a solution impossible – or are pensions simply not what the self-employed need? 

 

The labour market is changing; 4.8m, 15% of Britain’s labour force, are currently self-employed, compared with 12% in 2001. 

 

These figures from the Office for National Statistics show the continued growth in self-employment, in part made possible by the digital revolution, which allows anyone to build a business from their bedroom. Accordingly, a much greater number of self-employed than in the past has no employees – 4m compared with 2.4m in 2001.  

 

Government trials limited to behavioural nudges 

 

The 2017 Tory election manifesto committed its government to “make auto-enrolment available” to the self-employed. Then, just before the Christmas break in 2017, the government kicked reforms to auto-enrolment into the “mid 2020s”, otherwise known as ‘the long grass’. It started trialling different approaches “to inform and develop the evidence base”, centred on behavioural nudges but not the framework. It has yet to report back on the results; the DWP says these will be available “in due course”. 

 

Tom Selby, senior analyst at platform provider AJ Bell, believes the government is too absorbed with Brexit to deal with this issue and says that “there is a sense that the self-employed pensions issue has been shoved on the ‘too difficult’ pile, at least for now”. 

 

While pilot studies around behavioural nudges are underway, “there has been no indication that any extra financial incentives will be put in place”. 

  

Selby says it is unlikely such interventions will have anywhere near the impact that auto-enrolment has had in the workplace pensions market. Yet the fact that there are more people who are self-employed, but who are less likely on average to be providing for their futures means policymakers "will be concerned about them falling back on the state in old age unless something is done”. 

 

Lack of suitable financial advice and products 

 

The self-employed tend to be focused on the present, according to research by the Association of Independent Professionals and the Self-Employed, and so it is no surprise that pensions are not a priority; where they do think about the longer term, the self-employed tend to invest in property rather than pensions, the DWP has found. 

 

One of the problems IPSE identified is the lack of financial advice oriented towards the self-employed, as well as their variable cash flow, which is due not only to the availability of work but also to the poor payment culture among some clients. 

 

Self-invested personal pensions often require regular contributions to be made, which is at odds with the financial reality the self-employed live in, and special products are few and far between. While a private pension is of interest to 42%, more than a fifth say they don’t need it, according to consultancy Barnett Waddingham. Life insurance was the only benefit being taken by more than one in five (29%) of those surveyed. 

 

Is it time for a tax shake-up? 

 

The government has tried to remedy some of the issues affecting the self-employed, who can now accrue more state pension than they could before this was reformed, while national insurance contributions have not been increased; former chancellor Philip Hammond performed a U-turn after seeking to raise class 4 NICs in March 2017. 

 

But as the state pension in the UK replaces less than a third of the average income, the issue of private saving keeps coming up. 

 

Mark Futcher, partner and head of DC and workplace wealth at Barnett Waddingham, notes that personal pensions, the current option for the self-employed, generally carry greater charges and less formal governance than workplace pension schemes. 

 

As there is no employer to place duties on, a solution is harder to find without “a radical shake up of the wider taxation system”, he adds. 

 

Despite the problem posed by the absence of an employer, he calls employer-provided pensions a success, having raised standards in the sector. “We now must find a way to use this scale to bring these advantages to the self-employed. This could be done if authorised master trusts allowed individual members to access their products,” he says. 

  

Jamie Smith, head of financial proposition at master trust Smart Pension, says the industry is not good at offering 21st century savings options that suit modern ways of working. 

  

“It’s clear that we have to better understand the competing priorities of the self-employed and develop something that is accessible while recognising the challenges, particularly amongst millennials who now account for a third of all self-employed,” says Smith. 

 

He suggests flexible savings via enhanced ISAs or side-car savings mechanisms that take into account fluctuating income and the need to invest in equipment from time to time. Self-employed contractors with multiple contracts could also join their employer’s auto- enrolment scheme, he proposes, and then aggregate these pots using the infrastructure that will be developed through the pensions dashboard. 

 

So is the problem partly the pensions industry’s? Baroness Ros Altmann, a former pensions minister, says it is not clear that there is a ‘solution’ to the self-employed issue, and notes that the industry has failed to cater for the self-employed. 

 

“The pensions industry’s expectation that government should bring the self-employed into their products is not entirely reasonable,” says Altmann. While pensions offer significant tax benefits, "the problem is more that the pensions industry does not reach out to customers and promote pensions effectively”, says Altmann.  

 

“If they did, then the self-employed could be more aware of the benefits and more likely to make provision for themselves. The other area that needs to be improved is the reputation of financial advice, since most financial advisers would help their clients make the most of pension savings,” she adds.