How to solve the self-employed pensions crisis

Launched today, a new IPSE report – 'How to solve the self-employed pensions crisis' – reveals the true extent of this looming crisis. Research carried out by our partner, ComRes, shows just 31 per cent of the self-employed are saving into a pension, highlighting the unavoidable need to act now before it is too late.

IPSE is concerned that if this issue is not addressed, sooner rather than later we will face serious consequences as the current generation approaches retirement age. The state pension is already under significant pressure and its future has already been called into question in recent years.

Failure to alleviate the self-employed pensions crisis will only exacerbate the burden on the state further. If a large proportion of self-employed people enter retirement and rely on the modest state pension as their primary, rather than supplementary source of income, we may see an increase in pensioner poverty and a downward shift in living standards.

Our research shows three groups most at risk: those new to self-employment, women and younger self-employed people. With the rate of women entering self-employment growing by 75 per cent, and the sharp rise of 16-24-year-olds (104,000 in 2001 to 181,000 in 2016) these sub-sections of the self-employed simply cannot be ignored.

IPSE has identified a series of issues which have contributed to low rates of self-employed people saving for later life.

• Millennials are not saving for later life: For understandable reasons, saving for later life is a distant prospect for this section of the self-employed. They face difficulties with saving and have not been either proactively engaged by the pensions industry about the benefits of saving or offered savings options that are flexible enough to suit their needs.
• Pensions have a PR problem: Laborious paperwork and complicated language make pensions inaccessible for many. As a result, people don’t engage with them which can ultimately deter them from saving for later life. The banking industry suffered from similar problems but has since overcome them using apps to improve engagement.
• Automatic Enrolment (AE) doesn’t work the self-employed: The pensions industry and Government has focused on how to treat self-employed people like employees by investigating ways of extending AE to this sector. As the Government review concluded last year, however, there is no clear way. Our research shows a clear majority would either opt-out or were unsure. Instead, the Government and the pensions industry should redouble efforts to better engage with the self-employed and provide them with the flexible options they want.

Using nationally representative research – which comprehensively analysed the attitudes of over 1,000 self-employed people – as well as a broad consultation with the industry and Government, we developed a number of recommendations to combat the issue:

1. Roll-out the sidecar pension: This product works by channelling money into both a pension pot and a separate ‘rainy day fund’ to be drawn on in times of emergency. Whilst not a catchy name, it would certainly cater well for the low-middle earning self-employed who want more flexibility in their savings options.
2. Provide tailored guidance on saving for the self-employed: 51 per cent of the self-employed trust Government websites for advice but many found this guidance too heavily focused on employees. Going forward, the new Single Financial Guidance Body should offer tailored advice for the self-employed.
3. Pensions policy documents should be jargon free and written in plain English: Many in our focus groups told us they only wanted to know the key terms of a pension policy and were often overwhelmed by unnecessary terms and conditions that could be moved into an appendix.
4. Roll out the mid-life MOT: This would enable mid-career self-employed people to identify gaps in their savings and address where action is needed before it becomes too late.
5. Universities, schools and pension providers should work together to provide financial education for younger people: This could be supported by pensions providers engaging with students on courses that typically lead to self-employment, such as the creative arts.
6. The Government should not introduce Automatic Enrolment (AE) for the self-employed: There is no clear way this would work for the self-employed. They are ambivalent about the policy and likely to opt-out anyway. Instead, more energy should be focused on providing options such as the sidecar pension.

Our recommendations don’t stop there, however. Download the report to read the full list.

Despite the high numbers of self-employed people not saving for later life, the Government and the pensions industry should treat this as an excellent opportunity to act. Considering an overwhelming 67% of the self-employed population are concerned about this issue, positive intervention would go a long way.