Is Auto Enrolment Leaving The Self-Employed Behind?
While there have been a few bumps in the road along the way, automatic enrolment has generally been a success so far. But what are the implications for the self-employed? We take a look…
With opt-out rates for auto enrolment reported to be as low as 9%, the plan to enrol workers into corporate pension schemes is proving to be a major success. Lower-paid workers who may never have been entitled to a corporate pension have suddenly been granted a chance to save for retirement and with 91% of workers happy to be involved, 8.5 million workers could, by 2030, be newly saving into a workplace pension.
But what about those workers who are self-employed?
Data from the Office for National Statistics shows that there are over 4 million self-employed workers in the UK and, worryingly, that only 22% of them contributed to a pension scheme in 2012/13 – a massive drop from the 62% of self-employed workers which contributed to a pension in 1996/97.
Automatic enrolment has solved a large part of the pensions crisis by encouraging workers to save and to save early - given that anyone over the age of 22 years old is automatically enrolled into their workplace pension scheme. However, automatic enrolment will obviously do absolutely nothing to help the self-employed.
The Pensions Policy Institute has said: “Unless a significant proportion of self-employed people choose to join a pension scheme, pension saving may remain low among this group even after automatic enrolment.”
And the figures have shown that this group aren’t queueing up to join pension schemes privately either. That's understandable since the returns are not as great when contributing independently, with research from Prudential calculating that the average self-employed worker misses out on £91,500 in employers’ company pension contributions over a lifetime.
So what is being done to encourage the self-employed to start saving?
Well, not that much in all honesty. From April 2016, self-employed workers who have made at least 10 years of National Insurance contributions will be entitled to the new more generous state pension - which is a start. In terms of encouraging saving to private pension schemes, though, there has been little else done. The various pension reform announcements from the Coalition government have been positive and should encourage saving in general, with reforms such as allowing a pension pot to be passed on tax free, scrapping the 55% tax for withdrawing from a DC pension and offering free pension guidance upon retirement.
Whether or not these reforms are enough to encourage self-employed workers to start contributing to a pension fund remains to be seen, however. If they don’t work then a pensions gap could soon open up between employed and self-employed workers…
Photo credit goes to Thomas Leuthard