Self-employed pension gap - Fewer than 16% contribute to private pension
The Work and Pensions Committee recently called upon the Government to do more to recognise the current pension gaps for both those in employment and the self-employed. Whilst it’s important that all workers are recognised, there is a staggering difference between the number of workers and self-employed workers who currently contribute to a private pension, with only 16% of self-employed workers using private pension to save for their retirement.
A recent report from the Office for National Statistics (ONS) also found a significant difference in average pension wealth between employees and the self-employed, with self-employed workers more likely to report that they could not afford to contribute to a pension scheme.
Self-employment boom and the need for retirement saving
Since COVID-19, there has been an increase in more people becoming self-employed. However, whilst self-employment numbers rise, the number of those saving has significantly decreased, meaning that the majority of self-employed workers don’t appear to be saving enough for their retirement. With just 16% of self-employed workers currently saving for their future – this is a statistic that promptly needs to be addressed.
One aspect that impacts the difference between self-employed and company-employed workers that are saving to a private pension is the automatic pension enrolment scheme. The automatic pension enrolment scheme, which has proved massively popular within workplaces, was introduced by the government a decade ago to ensure all those in work were putting aside some money into a pension, however the scheme did not include self-employed workers.
Today, almost 90% of employees who are eligible for the automatic enrolment scheme are participating (meaning they must be over the age of 22 and earning over £10,000 per annum), making it a policy success for workplaces, but the self-employed sector is neglected from this policy.
Unlike those employed by companies that offer benefits and guarantees when it comes to pension schemes and salary, income for the self-employed can be unreliable. For some, this is enough to make it at times difficult to justify regularly paying into pension schemes.
Why is this important?
The long-term effects of these differences can lead self-employed people with little to no pension savings at all. As well as this being disruptive on a social level, self-employed workers having a poor pension outcome has the knock-on effect of being harmful to the economy as a whole. This is because a healthy economy relies on business innovation and small businesses to function properly. With a poor pension outcome, statistically it’s likely that many potential self-starters may be discouraged from entrepreneurship, deciding that starting a business is not worth risking the health of their financial future Even if in reality some of the self-employed community will likely rely on their business as their pension provision, many of them won’t. And ensuring that every self-employed worker has a pension to provide for them during retirement will reduce the possibility of them facing poverty and reliance on the state in the future.
Giving self-employed workers greater incentives to pay into pensions schemes could make a significant improvement in tackling this issue.
Please note: a pension is a form of investment. The value of these investments can fall as well as rise and you may not get back what you originally invested.