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10 ways to tackle the self-employed pension problem

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A new report has suggested 10 ways to encourage self-employed pension saving, amid concerns that some freelance, contract and temporary workers aren’t putting away enough for their retirement.

The Royal Society of Arts (RSA) study says barely one in five of the self-employed are currently contributing to a personal pension.

Most of these, it is claimed, tend to save too little and at too late an age.

Self-employed pension saving ‘a unique challenge’

The report states:

From carpenters to lawyers, and from beauty therapists to IT consultants, there are now close to 5 million people in the UK who count themselves as self-employed.

The evidence is overwhelmingly clear that most choose this path to have a better life – to pursue a passion, to break free from bureaucracy, and to have more flexibility to look after loved ones.

The picture that is often portrayed of a downbeat army of workers forced into self-employment under duress is a far cry from reality. But the self-employed do face unique challenges – none more so than in preparing for later life.

Why don’t self-employed people save more for retirement?

According to the RSA, there are many reasons why the self-employed either choose not to save into a pension pot, or struggle to do so.

The report identifies several barriers to retirement saving, including:

  • The absence of an employer to make pension contributions;
  • Difficulty in finding spare income for savings;
  • Volatile incomes;
  • A lack of pension advice and guidance;
  • Misinformation, for example the myth that ISAs are more tax efficient than pensions (they are not, says the RSA);
  • Confusion caused by frequent changes to pensions policy, from the new pension freedoms introduced in 2015 to auto-enrolment and the Lifetime ISA;
  • A simple lack of time: “With so much time spent creating a product or service, winning over new customers and managing accounts, rarely do the self-employed have spare cognitive bandwidth to think about their future selves.”

Reforming self-employed pension saving in 10 steps

The RSA states that:

Pensions are not a panacea but as far as long-term saving vehicles go, they are the best and safest option available.

It then proposes 10 solutions to the self-employed pension saving problem.

1. Introduce a Pensions Passport

This would allow employees moving into self-employment to continue contributing to a pension with their existing provider.

2. Clarify the Lifetime ISA (LISA)

It is claimed that, by ostensibly competing with pensions, the launch of the Lifetime ISA (LISA) “may have added another layer of complexity to an already confusing landscape of financial products.” The RSA says the government must clarify the purpose of the LISA and explain the gap it is intended to fill.

3. Extend auto-enrolment to the self-employed

The report states: “In partnership with the pensions industry, the government should also redouble its efforts to find a model of auto or assisted enrolment for the self-employed, potentially by placing a new duty on accountancy software providers to enlist their clients onto a pension.”

4. Empower people with information

Another idea put forward in the report is to present the self-employed with more timely information on the state of their finances, thereby allowing them to make better judgements on what they can afford to save.

5. Offer early access to savings

The RSA rightly observes that self-employed workers “need greater access to their savings to see them through bouts of illness and periods of feast and famine.” At the same time, unfettered access to a pension pot could lead to a hasty and ill-informed decision to withdraw funds.

The proposed solution is a ‘sidecar’ pension product that combines an accessible rainy day fund with a standard pension.

6. Offer sick pay to the self-employed

The government is urged to address the lack of sick pay among the self-employed which, according to the RSA, “indirectly hinders a long-term savings culture.” Self-employed people could be presented with an income protection (IP) insurance policy as they complete their self-assessment tax return.

7. Ensure self-employed pension pots are spent wisely

Noting that a self-employed person will typically have a smaller pension pot than someone who has spent 40 years in permanent employment, the report authors say the self-employed must manage their pension pots more cautiously.

The RSA backs the idea of ‘auto protection’, which defaults savers onto a drawdown scheme at the age of 65, withdrawing 5 per cent from their funds every year.

8. Provide guarantees for later life

In addition to the above measure, ministers are encouraged to throw their weight behind Collective Defined Contribution schemes, which are designed to provide guaranteed income in retirement.

9. Set up an official body

The RSA would like a new Office for Financial Security to be established. Amongst other things, this body would be tasked with undertaking periodic reviews into the financial health of the UK’s self-employed population.

10. Revamp tax relief

Last but certainly not least, the report calls for an ambitious reform of the tax relief system. The RSA proposes replacing the existing multi-tiered tax relief system with a single flat-rate of tax relief — or a ‘tax bonus’ — worth 30 per cent. This means anyone wishing to save £100 in a pension would only need to contribute £70.

Under the new system, it is estimated that a self-employed worker on an income of £15,600 who contributes 5 per cent of his or her salary to a pension scheme would see their annual tax relief jump from £195 to £335.

Read the report in full

The full report, called Venturing to Retire, can be downloaded from the RSA website:

Get the report

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