While auto-enrolment has bolstered pension coverage of those working for others, retirement provision has ebbed away from the self-employed. According to the Institute for Fiscal Studies, the proportion of this cohort who save for a pension declined to 16% in 2018 from 48% in 1998.
In contrast, according to the Office for National Statistics (ONS), in 2019 77% of UK employees were members of a workplace pension scheme. This is a significant increase from 47% in 2012, when auto-enrolment was introduced.
Who are the self-employed?
The self-employed are significant minority of the working population. The ONS says they numbered 4.4 million in 2020, equivalent to 13.5% of the total workforce. While the pandemic caused the number to shrink last year, between 2008 and 2019 there was a 40% rise in the number of self-employed.
It’s often assumed self-employed population is mainly made up of company directors but it is heterogeneous group spanning multiple occupations.
IPSE, the self-employed trade association, points out there are many highly skilled freelancers working in numerous industries. This includes media, skilled artists, healthcare, design, IT and sport and fitness – as well business proprietors. Many of these freelancers increased during the pandemic.
The largest self-employed group is the construction and building trading, which dropped by 8% to 405,000 in 2020. Those working in road transport and agriculture also fell last year. There were sharp declines among those working in hospitality, sales and marketing as well as the leisure sector.
Improving retirement prospects
As explained in the UK Pension Landscape series, the closure of defined benefit schemes caused a rapid decline in pension coverage among the employed at the start of the millennium. Auto-enrolment has reversed this trend and could help to address the issues among the self-employed.
But there are challenges to rolling out this policy to this cohort. As the self-employed often use self-assessment rather than PAYE, it makes sense for HMRC to be responsible for transferring contributions to pension pots.
In 2017 the former pensions minister Steve Webb suggested changing the Class IV national insurance contributions by the self-employed from 9% of applicable earnings to 12%, giving the self-employed the option to either pay those earnings into a pension or giving them to the Treasury.
As 3% of earnings will be insufficient to generate a decent pension, he suggested the self-employed would only be able to access the money at retirement if they contributed an additional 5% into that pension scheme.
There are viable suggestions for solving the pension conundrum for the self-employed but, as yet, there seems no political will to grasp the nettle and ensure this cohort can enjoy a better retirement.